Online reputation systems: Design and strategic practices

This paper provides a comprehensive framework for evaluating the effects of feedback systems, and the potential problems with feedback systems, on seller incentives to provide high quality products under the case of asymmetric information. In particular, a baseline auction system without a feedback-based reputation system is first modeled and it is shown that the market for the sale of high quality products may not be sustainable. We then show how the institution of a feedback system can lead to sustainable market outcomes. Next, we demonstrate how three practices – the changing of identifications by dishonest sellers, shilling, and failure to leave feedback – can negate the usefulness of the feedback system in maintaining the market. Finally, we describe some actions that may be taken to overcome these problems. These results highlight the important role market managers play in ameliorating these market failure problems and ensuring the effective functioning of a market.