Virtual Trust – how reliable is e-Bay’s online reputation system in fostering trust amongst users?

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Prepared for the University of St. Gallen - Law & Economics of Cyberspace Seminar
Presented to: Dr. John Palfrey (Harvard) & Dr. Urs Gasser (St. Gallen/Harvard)

* Examined e-Bay’s online reputation system and the positive economic gains achieved by e-Bay as a result of creating ‘virtual marketplace trust’

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Virtual Trust – how reliable is e-Bay’s online reputation system in fostering trust amongst users?

  1. 1. Law & Economics of Cyberspace Laura Elizabeth Catton VIRTUAL TRUST – HOW RELIABLE IS E-BAY’S ONLINE REPUTATION SYSTEM IN FOSTERING TRUST AMONGST USERS? BY: LAURA ELIZABETH CATTON e-Bay, an online auction site started in San Jose, California in 1995, has grown exponentially over the past eleven years to having a staggering 181 million registered users in 33 international markets and grossing revenues of $1.390 Billion in the first quarter of 20061. The success of e-Bay was not certain when first founded by Pierre Omidyar, although sensational in retrospect. e-Bay had one inherent problem from the very start – trust (trust being defined as “the subjective assessment of one party that another party will perform a particular transaction according to his or her confident expectations, in an environment characterized by uncertainty”2) Trust is easy to establish in the real world: local transactions allow the buyer to examine the goods prior to purchase, repeat purchases from the same vendor lends a sense of familiarity, and reputations about the vendor surface amongst the community. Trust also spawns from other contexts: brand names give the vendor a corresponding image, businesses tend to develop stature over time, and expenditures, such as storefront indicated reliability3. Such trust, however, is not as easily developed in the virtual world: Customers rarely repeat, and they do not run into each other. Putting items on the Web is a cheap activity. Some goods that are traded are not brand name, and when they are there is a risk of being counterfeit. Measured in relation to the age of significant retail operations, all of the sellers are new. No one attests about the sellers. Firms like eBay do not stand behind their auctioneers.4 Cyberspace’s anonymity and lack of personal contact is the source of lack of trust between business partners on the internet and, according to former United States of America President William Clinton and Vice-President Albert Gore, Jr. in the publication A Framework for Global Electronic Commerce, “in order to realize the commercial and cultural potential of the Internet, consumers must have confidence that the goods and services offered are fairly represented, that they will get what they pay for, and that recourse or redress will be available if they do not.” e-Bay is faced with the daunting task of fostering trust between all 181 million registered users in a market where goods cannot be inspected and vendors cannot be authenticated. Fostering Trust: e-Bay’s Online Reputation System 1 "e-Bay Announces First Quarter 2006 Financial Results." e-Bay. 19 Apr. 2006. <www.ebay.com>. 2 Ba, S. and Pavlou, P. A. (2002) Evidence of the effect of trust building technology in electronic markets: price premiums and buyer behaviour, MIS Quarterly, 26, pp. 243–268 3 Resnick, Paul, and Richard Zeckhauser. Trust Among Strangers in Internet Transactions:. 05 Feb. 2001. <http://www.si.umich.edu/~presnick/papers/ebayNBER/RZNBERBodegaBay.pdf>. 4 Resnick, Paul, and Richard Zeckhauser. Trust Among Strangers in Internet Transactions:. 05 Feb. 2001. <http://www.si.umich.edu/~presnick/papers/ebayNBER/RZNBERBodegaBay.pdf>. 1
  2. 2. Law & Economics of Cyberspace Laura Elizabeth Catton e-Bay pioneered a online reputation system to promote trust between ‘virtual strangers’. e-Bay’s online reputation system allows users, registered usually under a fantasy names such as BobTheChef06, to view an online evaluation of other members – whether they be buyers or sellers. At the end of a transaction both the buyer and seller are encouraged to leave ‘feedback’ for the other: there is a field for specific comments along with a ranking on whether the transaction was positive, neutral, or negative [Figure 1]. The registered user is also given a summary feedback score, ranked out of 100%. The score is determined by an addition of one point for each positive feedback and subtraction one point for negative feedback or, more simply, the number of positive comments minus the number of negative comments. Negative feedback is often given to buyers for non-payment while late shipments, no shipment, or deliverance of items not fitting the description of the item listed for sale constitutes giving negative feedback towards the seller. Economic Consequences of Negative Feedback A potential buyer must weigh their risk aversion when analyzing a seller’s feedback score – a rational buyer will want to maximize their gains while minimizing their risk/chance of loss. Consumers, correspondingly, contribute a cost premium to ‘trust-worthy’ sellers with reputable virtual reputations and discount their reservation price for items being sold by sellers with tarnished virtual reputations. Consequently, studies have shown negative feedback has been proven to lower a seller’s profit margins. Lucking-Reiley et al. found in their research that “a 1% increase in the seller’s positive feedback ratings yields a 0.03% increase in the auction price on average. The effect of negative feedback ratings is much larger, and—as expected—in the opposite direction: a 1% increase causes a 0.11% decrease in auction price on average.” For the reason that reputations become increasingly profitable over time with the increase of further positive transactions, game theory suggests that sellers are at an advantage to choose cooperation over time rather than a one-time, self-interested cheat. Lucking-Reiley et al.’s findings demonstrate that slip-ups in one’s virtual reputation are rather costly to the seller with an average 0.08% decrease in the seller’s auction price per 1:1 negative- positive ratio. It is this direct effect on a seller’s profit-margin that makes e- Bay users play fair in hopes to not jeopardize their virtual reputation with negative feedback: Online feedback mechanisms have emerged as a viable mechanism for fostering cooperation among strangers in such settings by ensuring that the behavior of a trader towards any other trader becomes publicly known and may therefore affect the behavior of the entire community towards that trader in the future. Knowing this, traders have an incentive to behave well towards each other, even if their relationship is a one-time deal.5 5 D Dellarocas, Chrysanthos. The Digitization of Word-of-Mouth:. MIT Sloan School of Management. 2003. 1-36. <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=393042>. 2
  3. 3. Law & Economics of Cyberspace Laura Elizabeth Catton eBay's reputation system is able to overcome the initial dilemma of developing a network of trust by lifting the veil of anonymity that is normally associated with the Internet. It gives sellers and buyers a virtual identity that is authenticated through their member profile. By establishing a good reputation, people earn trust: “eBay’s impressive commercial success seems to indicate that its feedback mechanism has succeeded in achieving its primary objective: generate sufficient trust among buyers to persuade them to assume the risk of transacting with complete strangers”6. But is this trust created by e-Bay’s reputation system justifiable? e-Bay’s Online Reputation System – A Mechanism For Fraud? Fraud is becoming increasingly popular via e-Bay and the reputation system often helps further fraudsters attempts. Identity ‘hijacking’ nourishes off the positive reputation of other users: Hijackers typically obtain passwords to accounts by "phishing," which entails spamming thousands of e-mail addresses with official- looking, but bogus, messages [Figure 2] that solicit passwords to auction accounts. Once hijackers gain access to an account, they impersonate the legitimate owner, benefiting from that person's positive feedback (which previous customers post after each transaction).7 “Phishing” was at an all time high in March 2006 with 18 4808 cases reported. It is e-Bay’s online reputation system that provides the fraudsters a reputable, and hence profitable, virtual reputation to exploit. Fraudsters have developed further methods to take advantage of others via their ‘impressive virtual reputation’ on e-Bays online reputation system. Fraudsters have been known to legitimately build a positive reputation by rightfully selling low cost items and receiving positive feedback for doing so. Once gaining a sufficient positive rating on e-Bay, the Fraudster uses his good reputation, and corresponding consumer trust, to fraudulently list expensive items and cash in on innocent buyer’s reliance on the Fraudster’s virtual reputation. Collusion between other members to leave positive feedback for each other is additional method used by fraudsters to build their virtual reputation: I've seen people doing auctions where they say 'this is a feedback auction' . . . what happens is the seller is saying to the buyer 'you give me good feedback and I'll give you good feedback', but they 6 Dellarocas, Chrysanthos. The Digitization of Word-of-Mouth:. MIT Sloan School of Management. 2003. 1-36. <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=393042>. 7 Sutherlands, Benjamin. "Swimming with Sharks; with More People Buying Goods on Online Auction Sites, Crooks are Getting Even More Aggressive." Newsweek International Edition 27 Mar. 2006, International ed. 8 "Crimeware Contagion Breaks Records in March." Anti Phishing Working Group. May 2006. <http://www.antiphishing.org/>. 3
  4. 4. Law & Economics of Cyberspace Laura Elizabeth Catton don't exchange any money. They do it to get their feedback rating improved, they're working the system . . .' “9 e-Bay limits the right to contribute feedback only to those involved in transaction. Fraudsters, however, find it economically advantageous to pay the upfront costs of the auction fees in order to carry out bogus transactions with other scammers to generate positive feedback and establish trust for their identity in the e-Bay community. Once more, the intention of establishing a positive virtual reputation is for large economic gains through fraudulent high-value sales in the future. According to Sutherlands of Newsweek (International Edition): one reason fraud is on the rise is that more and more auctions sites have been popping up thanks to inexpensive do-it-yourself programs. And eBay--the leader with 181 million people trading more than $40 billion a year worth of merchandise--signs up 110,000 people each day, providing crooks with a huge pool of neophytes to swindle. Rietjens believes this increase in fraud activity, and simplicity of executing fraud via e-Bay’s online reputation system, could undermine e-Bay’s whole business model of trust: Although the reputation system has benefits regarding honest repeat players, it does not provide any real protection against fraudsters if one considers the ease with which reputation systems can be manipulated. eBay's business model is based on trust. If eBay members start to realise that the reputation system does not provide any (preventive) protection against fraud, it might have a serious impact on eBay's business. Vulnerability of e-Bay’s Reputation System to Social Norms The vulnerability to fraud, however is not e-Bay’s reputation system only weakness. Social norms also tend to skew the reputation system’s results towards more favourable results – “because these reputation systems are public, giving positive feedback to enhance someone’s reputation becomes a form of social capital for the giver, while social pressures often suppress publicly voicing negative feedback.”10 Feedback is overwhelmingly positive with buyers ranking sellers 99.1% of the time positive, 0.6% negative, and 0.3% neutral11. Economically, there is little motivation for buyers to provide feedback to the seller after the transaction is concluded12. It is often easier 9 Cameron, Dylan, and Allison Galloway. "Consumer Motivations and Concerns in Online Auctions: an Exploratory Study." International Journal of Consumer Studies 29 (2005): 181. Synergy Blackwell Journals. Ex Libris. University of British Columbia, Sankt Gallen. 10 Liu, Hugo, Judith Donath, and Pattie Maes. Brokering Private Reputation Information. MIT Media Laboratory. 1-7. 11 Dellarocas, Chrysanthos. The Digitization of Word-of-Mouth:. MIT Sloan School of Management. 2003. 1-36. <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=393042>. 12 Cameron, Dylan, and Allison Galloway. "Consumer Motivations and Concerns in Online Auctions: an Exploratory Study." International Journal of Consumer Studies 29 (2005): 181. Synergy Blackwell Journals. Ex Libris. University of British Columbia, Sankt Gallen. 4
  5. 5. Law & Economics of Cyberspace Laura Elizabeth Catton for buyers to simply avoid posting feedback rather than posting criticism. e- Bay’s reputation system has fallen a victim to the common notion that ‘if you don’t have something nice to say don’t say anything at all’. Furthermore, leaving negative feedback can spawn retaliation and ‘feedback wars’. A first mover-disadvantage is created: by voicing negative feedback about the buyer/seller you could in turn damage your own virtual reputation by initiating revenge. Innocent parties’ reputations can also be skewed towards a more negative outcome by conniving competitors. Sabotaging competitors’ reputations by purchasing items from them for the sole purpose of leaving illegitimate negative feedback is another problem arising with e-Bay’s online reputation system. In a market with so many identical goods being sold by a multitude of different sellers, negative feedback could devastate a seller’s chance of making any revenue. Cameron and Galloway found in their studies that: Opinion was almost unanimous in viewing the feedback system as a vital element in both selecting which items to buy, and the overall reduction of fraud. Many of the respondents indicated that poor seller feedback had stopped them bidding in the past, and it brought to light the feeling that this is easier to do on eBay in particular, because of the huge number of sellers offering similar products. Competitors could gain a profitable advantage over rivalling sellers by slandering their rival’s reputation. With possible skewed results towards positive ratings attributable to social norms and deceitful negative feedback given in retaliation or for competitive advantage one has to ask how reliable is e-Bay’s reputation system? e-Bay’s Solution: Follow-up Comments e-Bay addressed this quandary of possible wrongful negative feedback by implementing a follow-up options; recipients of feedback are given the option to post follow-up comments to feedback given to them. Follow-up comments allow the recipient give explanations, outcomes, or denial of negative feedback they received. If a competitor was trying to undercut your online reputation with negative feedback you could, for instance, compose a follow- up statement as follows: ‘Sent item, you received it, why negative feedback?’ Likewise, if negative feedback was given prematurely the recipient can note that the transaction worked out in due course: ‘Sorry for delay, posted to the wrong zip-code, my fault, buyer received package last week!’ Follow-up comments are often seen as a constructive way to mitigate the effects of negative feedback: Consumers suggest that an opportunity exists to, in spirit, turn a negative into a positive or, as in service recovery reduce the deleterious effect of a negative comment situation: “When someone leaves a response to a complaint, it shows that they care,” “When someone leaves a response, it shows they want to receive good feedback all of the time” and “It's good to say that you're upset in 5
  6. 6. Law & Economics of Cyberspace Laura Elizabeth Catton your response if you've got a few negatives and a high feedback score.”13 Follow-up comments, however, are not always seen as a favourable way to lessen negative feedback. Follow-up comments which do not address the complaint or respond with spiteful/retaliatory responses actual make the negative comments more credible and, consequently, hurt the user’s virtual reputation further. Lack of Transparency to Examine Negative Feedback A common complaint amongst users using e-Bay’s online reputation system is the lack of transparency to view negative feedback. e-Bay does not offer the option for users to search merely for negative feedback – users must subsequently search into retroactive comments to find the comments corresponding to the negative feedback. Similar to social gossip, where the scandalous news is the most popular, users put a higher weighted value on negative feedback as opposed to positive feedback (Lucking-Reiley et al., 2005). However, in contrast, users give different credence to negative feedback according to the nature of the comment. ‘Slow shipping’ and ‘slow response to e-mails’ are, although bothersome, only a minor infraction according potential buyers as opposed to ‘item was not as described – got junk – SELLER WOULD NOT REFUND – BEWARE!’ Giving the user easier access to exclusively the negative feedback comments would give the user a better capacity to judge whether they feel the negative was deserved and the significance of the negative feedback. On the other hand, a drawback to making negative feedback more transparent is the overemphasis of the negative; no longer are the 990 positive feedback comments as important when the user can simply bypass straight to the 1% of the comments -- the 10 negative comments. e-Bay’s Online Reputation System: Fostering Trust? With the looming fret of fraud, possible skewed results towards positive ratings attributable to social norms and deceitful negative feedback given in retaliation or for competitive advantage how reliable is e-Bay’s online reputation system in fostering trust amongst users? e-Bay’s continuous growth over the past eleven years has revealed that consumers do trust e-Bay’s online reputation system. e-Bay’s users view the possible risk of fraud amongst the reputation system as just one of the costs of a good bargain: “overall, the threat of fraud is seen as the biggest concern in using online auctions, yet the potential to discover a bargain ensures that the perceived benefits outlined through this study far outweigh the perceived risks.”14 13 Weinberg, Bruce, and Lenita Davis. "Exploring the WOW in Online-Auction Feedback." Journal of Business Research 58 (2005): 1609-1621. Science Direct. Elsevier. University of British Columbia, Sankt Gallen. 6
  7. 7. Law & Economics of Cyberspace Laura Elizabeth Catton Likewise the common societal perception of “it won’t happen to me” mitigates the user’s fear of fraud – most e-Bay users believe that ‘fraud happens to others; fraud never happens to me’. A respondent in Cameron and Galloway’s exploratory study avowed: “I'd like to think I'd know if someone wasn't being truthful . . . If you were suspicious of everyone, what would be the point in using eBay at all?” Furthermore, e-Bay’s online reputation system helps to facilitate an efficient market with dynamic pricing. Price premiums and discounts are applied by the buyer in regards to their perceived risk: “we argue that buyers are willing to compensate reputable sellers with price premiums to assure safe transactions. On the other hand, buyers will penalize sellers of questionable reputation with a price discount because they must assume above average transaction-specific risks.”15 e-Bay has been diligent to uphold trust in their system as it is the basis for their business success. e-Bay has been continuously altering their online reputation system to make it less vulnerable. In 2001 e-Bay limited feedback comments to only those engaged in transactions with each other. e-Bay’s aim was to decrease ‘feedback padding’ (the practice of getting others to falsely leave positive ratings to boost one’s reputation). Likewise, e-Bay recently implemented the follow-up option to allow users to challenge false or retaliatory negative feedback. Furthermore e-Bay neutralized feedback left by members who did not participate in dispute resolution process proclaiming that: “we believe that members who don't participate in such dispute resolution processes shouldn't be able to impact another member's reputation”. Additionally, feedback was removed from users who did not continue to use e-Bay beyond the first 90 days of registration. e-Bay felt that “such members were never truly members of the Community, and so their feedback comments and ratings should not count.” Most recently e-Bay has implemented mandatory tutorials for new members attempting to leave neutral or negative feedback. e-Bay imposed this after research indicated that new users left the majority of negative feedback. Beyond their online reputation system e-Bay has been making additional improvements to e-Bay’s security. In 2002 e-Bay acquired PayPal, “an Internet business which allows the transfer of money between email users and merchants, avoiding traditional paper methods such as checks/cheques and money orders” (wikipedia.org), to facilitate more secure payment methods. PayPal provides buyer protection of up to $1000 and likewise makes it more secure for users to pay via credit card by concealing one’s credit-card information from other party. e-Bay likewise has implement 14 Cameron, Dylan, and Allison Galloway. "Consumer Motivations and Concerns in Online Auctions: an Exploratory Study." International Journal of Consumer Studies 29 (2005): 181. Synergy Blackwell Journals. Ex Libris. University of British Columbia, Sankt Gallen. 15 Cameron, Dylan, and Allison Galloway. "Consumer Motivations and Concerns in Online Auctions: an Exploratory Study." International Journal of Consumer Studies 29 (2005): 181. Synergy Blackwell Journals. Ex Libris. University of British Columbia, Sankt Gallen. 7
  8. 8. Law & Economics of Cyberspace Laura Elizabeth Catton ‘SquareTrade’, an online dispute resolution service to further promote a trustworthy community to perform e-commerce in. Pierre Omidyar, the founder of e-Bay, gave the following address about e- Bay’s online reputation system in e-Bay’s first year of operation: …but here, those people (dishonest people) can't hide. We'll drive them away. Protect others from them. This grand hope depends on your active participation. Become a registered user. Use our feedback forum. Give praise where it is due; make complaints where appropriate. Although with its own faults, e-Bay’s online reputation system has bestowed a channel to promote trust between users. Without trust between users there would be no transactions. Trust is the basis of all transactions. With an average of $1 511 worth of goods being sold per second on eBay worldwide it is obvious was e-Bay was able overcome their initial problem of developing trust in a virtual community – e-Bay gave users a virtual identity, removed the veil of cyberspace’s anonymity, and fostered trust between 181 million registered users in a market where goods cannot be inspected and vendors cannot be authenticated. 8
  9. 9. Law & Economics of Cyberspace Laura Elizabeth Catton Figure 1 Figure 2 Source: Identity Theft 911 - Consumer Education 9
  10. 10. Law & Economics of Cyberspace Laura Elizabeth Catton BIBLIOGRAPHY: Ba, S. and Pavlou, P. A. (2002) Evidence of the effect of trust building technology in electronic markets: price premiums and buyer behaviour, MIS Quarterly, 26, pp. 243–268 Cameron, Dylan, and Allison Galloway. "Consumer Motivations and Concerns in Online Auctions: an Exploratory Study." International Journal of Consumer Studies 29 (2005): 181. Synergy Blackwell Journals. Ex Libris. University of British Columbia, Sankt Gallen. Dellarocas, Chrysanthos. The Digitization of Word-of-Mouth:. MIT Sloan School of Management. 2003. 1-36. <http://papers.ssrn.com/sol3/papers.cfm? abstract_id=393042>. E-Bay. 29 Apr. 2006 <www.ebay.com>. Lessig, Lawrence. "Chapter 4: Architectures of Control." Code and Other Laws of Cyberspace. 1999. <http://codebook.jot.com>. Liu, H. et al. Brokering private reputation information in online transaction communities (draft). 2003. <http://web.media.mit.edu/~hugo/publications/drafts/GossipMonger.doc> Liu, Hugo, Judith Donath, and Pattie Maes. Brokering Private Reputation Information. MIT Media Laboratory. 1-7. Lucking-Reiley, David, Doug Bryan, Naghi Prasad, and Daniel Reeves. Pennies From EBay: the Determinants of Price in Online Auctions. 2005. 1-34. <http://www.u.arizona.edu/~dreiley/papers/PenniesFromEBay.pdf>. "New EBay Phishing Scam." Identity Theft 911 - Consumer Education. May 2006. <http://www.identitytheft911.org/> Clinton, William J., and Alberta Gore. United States. Cong. House. A FRAMEWORK FOR GLOBAL ELECTRONIC. Washington: GPO, 1997. Resnick, Paul, and Richard Zeckhauser. Trust Among Strangers in Internet Transactions:. 05 Feb. 2001. <http://www.si.umich.edu/~presnick/papers/ebayNBER/RZNBERBodegaBay.pdf>. Resnick, P., Zeckhauser, R., Swanson, J. and Lockwood, K. The Value of Reputation on eBay: A Controlled Experiment. Working Paper. 2002. <http://www.si.umich.edu/ ~presnick/papers/postcards/index.html> Rietjens, Bob. "Trust and Reputation on EBay: Towards a Legal Framework for Feedback Intermediaries." Nformation & Communications Technology Law 15 (2006): 1-55. Metapress Routledge. EBSCO. University British Columbia, Sankt Gallen. Sutherlands, Benjamin. "Swimming with Sharks; with More People Buying Goods on Online Auction Sites, Crooks are Getting Even More Aggressive." Newsweek International Edition 27 Mar. 2006, International ed. 10
  11. 11. Law & Economics of Cyberspace Laura Elizabeth Catton Wingfield, Nick. "E-Commerce (a Special Report): Cover Story --- are You Satisfied? --- EBay's Battle Against Fraud Rests Primarily on a Simple Concept: Customer Feedback." The Wall Street Journal 16 Sept. 2002, Eastern ed., sec. R7. ProQuest. ABI. University of British Columbia. 11

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