Strategic Behavior in Online Reputation Systems: Evidence from eBay

Abstract

This study examines how sellers respond to changes in the design of reputation systems on eBay. Specifically, we focus on one particular strategic behavior on eBay’s reputation system – the sellers’ explicit retaliation and subsequent revoking of negative feedback provided by buyers. We examine how these strategic sellers respond to the removal of their ability to retaliate against buyers and to revoke negative feedback. We utilize the biggest policy change of eBay’s reputation system in its history, which provides a natural experimental setting that allows us to infer the causal impact of the reputation system on seller behavior. Our results show that revoking enables low quality sellers to manipulate their reputations and masquerade as high-quality sellers. We find that these sellers react strongly to eBay’s announcement of a proposed ban on revoking. Interestingly, after the power of these revokers is curtailed, we find evidence that they exert more effort to improve their reputation scores. This study provides valuable insights about the relationship between reputation system and seller behavior, which have important implications for the design of online reputation mechanisms.