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

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


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


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
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


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
12
4


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


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


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

15
7


‘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


Figure 1

Figure 2

Source: Identity Theft 911 - Consumer Education

9


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.

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


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.

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