Reputation and Pricing Dynamics in Online Markets

TL;DR

This paper analyzes how reputation influences pricing and market competition among online sellers, showing that reputation disparities can lead to monopolies or stable equilibria depending on market capacity and initial ratings.

Contribution

It introduces a comprehensive model of reputation-based competition in online markets, considering different capacity scenarios and initial reputation effects.

Findings

High reputation sellers can dominate markets if reputation gaps are large.

Market stability depends on initial reputation ratings and seller capacities.

Reputation dynamics converge to stable states over time.

Abstract

We study the economic interactions among sellers and buyers in online markets. In such markets, buyers have limited information about the product quality, but can observe the sellers' reputations which depend on their past transaction histories and ratings from past buyers. Sellers compete in the same market through pricing, while considering the impact of their heterogeneous reputations. We consider sellers with limited as well as unlimited capacities, which correspond to different practical market scenarios. In the unlimited seller capacity scenario, buyers prefer the seller with the highest reputation-price ratio. If the gap between the highest and second highest seller reputation levels is large enough, then the highest reputation seller dominates the market as a monopoly. If sellers' reputation levels are relatively close to each other, then those sellers with relatively high reputations will survive at the equilibrium, while the remaining relatively low reputation sellers will get zero market share. In the limited seller capacity scenario, we further consider two different cases. If each seller can only serve one buyer, then it is possible for sellers to set their monopoly prices at the equilibrium while all sellers gain positive market shares; if each seller can serve multiple buyers, then it is possible for sellers to set maximum prices at the equilibrium. Simulation results show that the dynamics of reputations and prices in the longer-term interactions will converge to stable states, and the initial buyer ratings of the sellers play the critical role in determining sellers' reputations and prices at the stable state.