Quality, Uncertainty and the Internet: The Market for Cyber Lemons

Abstract

The internet makes it easier for buyers to purchase goods from distant sellers. However, the inability of the buyer to examine the merchandise results in asymmetry of information. This paper develops a the oretical model to analyze the relationship between quality and price in a setting of asymmetrical infor mation. In the spirit of Akerlof (1970), the model predicts that higher quality goods are less likely to be sold in the market. Since buyers have difficulty distinguishing quality, sellers would have to accept lower prices for their highest quality items. The model is tested using data from internet coin auctions.The results show that coins that are claimed to be of higher quality are less likely to sell and when they do sell do so at lower prices relative to their market value.

Effect of the food traceability system for building trust: Price premium and buying behavior

“…Due to the inherent physical and temporal separation between buyers and sellers in online environments (Pavlou et al, 2007), the agency problem of information asymmetry dominates (Huston and Spencer 2002). According to the principalagent perspective, information distribution between principals and agents is asymmetric.…”

Market structure and quality uncertainty: a theoretical framework for online auction research

“…Two studies have reported a positive relationship between seller expertise and auction price (Kauffman and Wood 2006;McDonald and Slawson 2002); however, Huston and Spencer (2002) found just the opposite. Although each of these studies investigated a thick market the two that found a positive relationship examined a market with a high level of quality uncertainty (i.e., uncertified coins of different types and denominations), whereas the lone study that found a negative relationship investigated a market characterized by a lower lever of quality uncertainty (i.e., 1921 Morgan Dollar certified and uncertified coins).…”

“…Other researchers, however, have found bidder expertise to have no effect on price. Gilkeson andHuston andSpencer 2002 examined thick markets with different levels of quality uncertainty (Quadrants I and II) and found no difference in the prices paid by experienced vs. inexperienced bidders. These results indicate that bidder expertise is more relevant in thin markets (in which equilibrium prices are less established) than in thick markets (in which equilibrium prices are more apparent).…”

“…Though a number of studies have found that seller reputation drives up the auction price (Ba and Pavlou 2002;Dewally and Ederington 2006;Dewan and Hsu 2001;Houser and Wooders 2006;Livingston 2005;Alm 2002, 2005), others have not found such effect (Ariely and Simonson 2003;Brint 2003;Eaton 2005;Resnick and Zeckhauser 2002). Similarly, several researchers have reported that experienced bidders are more likely to pay a lower price than less experienced bidders (Dewan and Hsu 2004); however, others studies do not support those findings (Gilkeson and Reynolds 2003;Huston and Spencer 2002). Unfortunately, given conflicting findings it is almost impossible to arrive at any valid generalizations regarding the effects of these factors on auction prices.…”

Internet Auction Features as Quality Signals

“…As Huston and Spencer (2002), Bajari and Hortacsu (2004), and Kazumori and McMillan (2005) note, the lemons problem stems from impersonal transactions and information asymmetry and may be the greatest obstacle to the rapid growth of Internet auction marketplaces. Despite their soaring popularity, Internet auctions remain far from mainstream e-commerce outlets.…”