Do buyer protection mechanisms help sellers? A model of seller competition in the presence of online reputation systems

Abstract

In online markets, consumers rely on reputation systems to make purchases decisions. However, traditional accumulative-score type online reputation systems bring disadvantages to new sellers since they do not have sufficient transactions. In this paper, we investigate how do consumer decision making as well as seller competition change after introducing buyer protection mechanisms, such as escrow services and money-back guarantee. Do consumers rely less on online reputation systems after launching buyer protection mechanisms? Does introducing buyer protection mechanisms alleviate the competition pressure among sellers? Does a new seller benefit more than an existing seller? This paper proposes a theoretical model to discuss how online reputation systems affect sellers and consumers in the presence of buyer protection mechanisms. Contrary to the conventional wisdom that buyer protection mechanisms enhance buyer experiences and give low-reputation sellers advantages, we find that such scenarios occur only in the short term. In the long run, consumers rely more on online reputation systems as the effectiveness of buyer protection mechanisms increase. Both consumers and low-reputation sellers can be worse off. We also empirically assess these theoretical predictions.