Can Buyer Protection Mechanisms Help Buyers?--The Impact on Seller Competition in the Presence of a Reputation System
Posted: 24 May 2018 Last revised: 28 Dec 2021
Date Written: May 9, 2018
Abstract
Online reputation systems are critical in addressing information asymmetry in online platforms. In this study, we study how the introduction of buyer protection mechanisms, such as guaranteed return, third-party escrow services and credit card guarantees, influence the effect of online reputation system on seller competitions as well as buyer welfare in an online platform. Will online reputation systems become less important to sellers? Can buyers really benefit from the introduction of such buyer-protection mechanisms? Are sellers better off? We develop a theoretical model to study the joint effect of online reputation systems and buyer-protection mechanisms. Contrary to the conventional wisdom that the buyer protection program improves buyer experiences and is more beneficial to a low-reputation seller, we find that even though such institutional mechanisms help in the short run, they can be detrimental to low-reputation sellers in the long term, and consumers can be worse off, and rely more on online reputation system when buyer protection program becomes more effective. Using a dataset from one of the largest online B2C markets in China, we also empirically assess these theoretical predictions.
Keywords: online reputation system, buyer protection program, pricing, seller competition
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