Reputation and Intermediaries in Electronic Commerce

Electronic commerce offers the promise of facilitating transactions, especially low-value transaction, between distant parties. These transactions, however, are not readily susceptible to the legal enforcement mechanisms that are typically assumed necessary to generate a successful system of commercial transactions. Enforcement costs related to long-distance, low-value transactions suggest that parties will forgo otherwise value-enhancing transactions unless they can find some substitute for ex post legal redress. In theory, a reputation for contractual performance can fill this gap. But the creation and transmission of reputational information is itself costly. The history of commercial transactions suggests that reputational intermediaries can reduce these costs. This paper explores the possibilities and limits of using such intermediaries in electronic commerce by investigating the efforts by eBay, the online auction site, to create a reliable base of information for and about its members. The paper concludes that eBay's mechanism, while valuable, may suffer from biases that limit the utility of the reputational information it provides. The paper examines possible changes in legal rules that could, in theory, improve the quality of information in electronic commerce.