To determine whether one wants to participate in a transaction, one must often depend on the other party’s reputation as there is frequently asymmetric information between buyers and sellers. For example, a seller may have private information about the quality of a product or the buyer about their willingness to pay. Reputation can therefore potentially minimize asymmetric information by signalling to buyers, especially in an online context, how trustworthy a seller is in their communication of quality and price.
Typically, reputation is constructed from the feedback and reviews of a seller from other buyers in the forms of word-of-mouth, written reviews and star ratings. With the introduction of the internet, the ease of leaving and reading feedback for a trade partner has since expanded.
Yet, how reliable are these online feedback mechanisms, e.g. online reviews and star ratings, as signals for the quality of a seller and their product or service? Further, if the internet does have an effect on these feedback loops, how does that in turn affect the reputation of a trade partner and therefore, a buyer’s willingness to participate in a transaction? Does a buyer’s willingness to leave honest feedback change in the online setting?
Bolton, Kusterer and Mans investigate whether uncertainty (due to a lack of reputation and feedback signals) about a seller’s responsibility lead buyers to either A) leave lenient reviews or B) remain silent after a negative experience with a seller. The researchers hypothesize that this buyer behavior could be due to the preference of making an „leniency error” rather than a “severity error” in the event that the cause of a negative experience with a seller turns out to be a misunderstanding or due to forces outside the seller’s control. For example, a package is never delivered and it is unclear whether the seller never sent the package or whether it was lost in delivery.
To investigate, the researchers created a market setting in which there is a noisy and true signal of seller effort to the buyer and where the buyer can then decide to leave feedback. The buyers are divided into two treatments: A) Uncertainty, which has the noisy signal and B) Baseline. In the uncertainty treatment, buyers receive a product that slightly differs from expectations. The researchers then analyze buyer likelihood to provide feedback and the constitution of the feedback, and go on to explore the drivers behind the buyer and seller‘s behavior.
Bolton, G. E., Kusterer, D. J., & Mans, J. (2019). Inflated reputations: Uncertainty, leniency, and moral wiggle room in trader feedback systems. Management Science, 65(11), 5371–5391. https://doi.org/10.1287/mnsc.2018.3191