Abstract
This paper provides a theoretical and experimental analysis of trust formation in markets with expert sellers and repeated interaction. Buyers are able to observe ex post whether the quality of a product was sufficient. This allows them to assess an expert’s trustworthiness by not following a high-quality product recommendation. We show that in the presence of a monopolistic seller, infinitely repeated interaction is not enough to induce buyer trust formation. However, with competing sellers, recommendations are partially informative and buyers trust recommendations with some probability. More intense competition in the form of second opinions further increases trustworthiness and trust. The experimental analysis supports the theoretical predictions regarding the effect of repeated interaction and competition on trust formation.
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