Internet Auction Features as Quality Signals

Abstract

Internet auction companies have developed innovative tools that enable sellers to reveal more information about their credibility and product quality to avoid the “lemons” problem. On the basis of signaling and auction theories, the authors propose a typology of Internet auction quality and credibility indicators, adopt and modify Park and Bradlow’s (2005) model, and use eBay as an example to examine empirically how different types of indicators help alleviate uncertainty. This empirical evidence demonstrates how Internet auction features affect consumer participation and bidding decisions, what modifies the credibility of quality indicators, and how different buyers react to indicators. The signaling-based hypotheses provide coherent explanations of consumers’ bidding behavior. As the first empirical study to evaluate the signaling role of comprehensive Internet auction institutional features in mitigating the adverse selection problem, this research provides evidence to clarify the economic foundation behind innovative Internet auction designs.