Reputation on the Internet

Economists have long studied the phenomenon of reputation, broadly defined as what agents (e.g., buyers) believe or expect from other agents (e.g., sellers). In a recent (partial) survey of the literature (Cabral, 2005), I listed several dozen contributions to this literature. So it is only fair to ask: What is special about reputation on the Internet? Why should a chapter like this be worth reading? There are several reasons that reputation on the Internet is a separate phenomenon in its own right, and one worth studying. First, the growth of the Internet has been accompanied by the growth of formal, systematic review and feedback systems (both of online market agents and of offline market agents who are rated online). By contrast, the traditional research on reputation was typically motivated by real-world problems where only “soft” information was present (for example, the reputation of an incumbent local monopolist such as American Airlines for being “tough” in dealing with entrants into its market). The second reason that reputation on the Internet forms a separate research area is that formal online reputation systems generate a wealth of information hitherto unavailable to the researcher. As a result, the economic analysis of online reputation is primarily empirical, whereas the previous literature on reputation was primarily of a theoretical nature. A third reason that the present endeavor is worthwhile is that online markets are important and increasingly so. Specifically, consider the case of eBay, one of OUP UNCORRECTED PROOF – FIRST-PROOF, 04/21/12, NEWGEN