Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace

Abstract

Reputation is critical to foster trust in online marketplaces, yet leaving feedback is a public good that can be under-provided unless buyers are rewarded for it. Signaling theory implies that only high quality sellers would reward buyers for truthful feedback. We explore this scope for signaling using Taobao's "reward-for-feedback" mechanism and find that items with rewards generate sales that are nearly 30%higher and are sold by higher quality sellers. The market design implication is that marketplaces can benefit from allowing sellers to use rewards to build reputations and signal their high quality in the process. Lingfang (Ivy) LiOur data were obtained from Taobao, the world's largest online customer-to-customer marketplace with nearly 500 million registered users. On March 1, 2012, Taobao introduced a feedback reward mechanism called "Rebate-for-Feedback" (RFF). 2 Sellers could set a rebate amount for any given items they sold (in the form of cash-back or a store coupon) as a reward for a buyer's feedback for purchasing that item. If a seller chooses the RFF feature then Taobao guarantees that the rebate is transferred from the seller's account to a buyer who leaves high-quality feedback. Feedback quality does not depend on whether it is favorable but instead depends only on how informative it is, which is measured by a machine learning algorithm that examines the content and length of the buyer's detailed feedback and whether key features of the item are mentioned.The RFF feature plays a dual role: first, it obviously can induce more feedback, and second, it can offer sellers a way to signal their high quality. Therefore, before a high quality seller accumulates sufficient positive feedback, the RFF feature allows him to send a signal about his quality and intentions to satisfy buyers. In addition, however, because the RFF encourages buyers to leave feedback, high quality sellers will gain in the long run from being able to attract more buyers without having to reward them for feedback. 3

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