Effectiveness of seller reputation as a solution to online lemon markets

Lemon markets, markets of asymmetric information in favour of sellers, cause selective market participation and exploitation of market conditions, known as adverse selection and moral hazard. To prevent both in online lemon markets that emerged with the Sharing Economy, connecting fragmented individuals to share, exchange, or sell underutilised assets, seller reputation mechanisms have been installed to signal trust. Their impact is corroborated by the reputation effect: commercial outcome increases with seller reputation. However, the underlying assumption of rational market participants, small, heterogeneous effect sizes, and few, unclear findings on marketplace design- and product-related moderation of the reputation effect question: Is seller reputation an effective solution to the problems associated with online lemon markets? In a twofold approach, seller reputation is studied through an observational study analysing eBay data and experimental studies using consumer behaviour in virtual marketplaces – to better understand the reputation effect, commercial effects of marketplace design and product attributes, and their moderation of the reputation effect. On eBay, the reputation effect holds with substantial commercial impact, despite limited seller distinction given ceiling effects in reputation system design. Sniping, incentivised by marketplace design generally reduces commercial outcome. Product attributes, sealed packaging and private photos, increase commercial outcome, and reduce the reputation effect. The reputation effect is experimentally confirmed and its product-related moderation supported. On eBay, photo frequency increases commercial outcome across seller cues and prior photo exposure is experimentally linked to it, partly via trust – in line with mere exposure, a preference for familiar stimuli. Findings suggest that seller reputation systems, though constrained by design deficiencies, effectively address problems associated with online lemon markets. While product attributes appear to complement seller reputation as trust-building signalling mechanisms, prior exposure to them may constitute an independent mechanism; jointly contributing to explain differences in observed commercial outcome.