Foundations and Trends® in Microeconomics > Vol 4 > Issue 4

Seller Reputation

Heski Bar-Isaac, Department of Economics, New York University, USA, heski@nyu.edu Steven Tadelis, Walter A Haas School of Business, University of California, USA, stadelis@haas.berkeley.edu
 
Suggested Citation
Heski Bar-Isaac and Steven Tadelis (2008), "Seller Reputation", Foundations and TrendsĀ® in Microeconomics: Vol. 4: No. 4, pp 273-351. http://dx.doi.org/10.1561/0700000027

Published: Aug 18, 2008
© 2008 H. Bar-Isaac and S. Tadelis
 
Subjects
Industrial Organization,  Sales Forecasting
 
Keywords
Information economicsGame theoryIndustrial organization
 
 
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In this article:
1 Introduction
2 A Simple Framework
3 Pure Hidden Information (The Learning Approach)
4 Pure Hidden Action (The Repeated Game Approach)
5 Mixed Models: Hidden Types and Actions
6 Trading Reputations
7 Exogenous Factors Influencing Reputation
8 Reputation and Institutions
9 Strategic Manipulation of Reputational Environments
10 Beyond Reputations for Quality
11 Empirical Studies
12 Future Directions
Acknowledgments
References

Abstract

Seller reputation is an important asset because buyers often choose sellers on the basis of their reputation. This is particularly true when the quality of the good or service transacted is hard to measure and the parties cannot perfectly contract on the outcome of the transaction. As a consequence, the seller will be mindful of building and maintaining a good reputation through the information that buyers have about the seller, including previous transactions and the reports of other buyers.

We introduce a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. We use this framework to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets.

After reviewing these theoretical building blocks we discuss several applications and empirical concerns. We highlight that the environment in which a transaction is embedded can help determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm's incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote.

We conclude by considering slightly different models of reputation that lie beyond the scope of our framework, briefly reviewing the somewhat sparse empirical literature, and highlighting and suggesting future directions for research.

DOI:10.1561/0700000027
 
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Table of contents:
1 Introduction
2 A Simple Framework
3 Pure Hidden Information (The Learning Approach)
4 Pure Hidden Action (The Repeated Game Approach)
5 Mixed Models: Hidden Types and Actions
6 Trading Reputations
7 Exogenous Factors Influencing Reputation
8 Reputation and Institutions
9 Strategic Manipulation of Reputational Environments
10 Beyond Reputation for Quality
11 Empirical Studies
12 Future Directions

Seller Reputation

Seller Reputation introduces a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. This framework is used to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets. After reviewing these theoretical building blocks, Seller Reputation examines several applications and empirical concerns. It highlights that the environment in which a transaction is embedded helps determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm's incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote. Seller Reputation concludes by considering slightly different models of reputation that lie beyond the scope of this framework, briefly reviewing the somewhat sparse empirical literature and suggesting future directions for research.

ISBN:978-1-60198-158-5 E-ISBN:978-1-60198-159-2 DOI:10.1561/9781601981592