Negative price premium effect in online market - The impact of competition and buyer informativeness on the pricing strategies of sellers with different reputation levels

a r t i c l e i n f o Motivated by the contradictory findings in literature regarding whether high-reputation sellers enjoy a price premium over low-reputation sellers, this paper examines the pricing strategies of sellers with different reputation levels. We find that a negative price premium effect (i.e., a high-reputation seller charges a lower price than a low-reputation seller) exists due to: (1) the presence of both informed and uninformed buyers, which makes sellers follow mixed pricing strategies. It is then possible for a high-reputation seller setting a lower price than a low-reputation seller. Moreover, when the proportion of informed buyers exceeds a certain threshold, the expected price of a high-reputation seller is even lower than that of a low-reputation seller ; (2) the competition among the sellers, which reduces the high-reputation sellers' prices but increases the low-reputation sellers' prices. Consequently, a high-reputation seller is more likely to charge a lower price than a low-reputation seller when the competition intensifies. Our empirical findings also support our theoretical results on the negative price premium effect. Online markets attract a lot of sellers due to the low entry and operational costs [38]. For example, in the " Electronics " category of BizRate.com, a famous price comparison shopping website, there are 3830 retailers, and more than 50 distinct retailers offering " Canon PowerShot SX210 IS 14.1 Megapixel Digital Camera — Black ". 3 However, it is not easy to inspect seller identity as well as product quality in online markets. The sellers are often hidden under the masks of meaningless electronic IDs [19]. At the same time, payment and delivery for the products are also separated [2]. These online market characteristics create chances for opportunistic behaviors, such as non-delivery, identity theft, and miscellaneous fraud [15,18]. In the year 2009 alone, the Internet Crime Complaint Center (IC3) 4 website received 336,655 complaint submissions, corresponding to a $559.7 million dollar loss [18]. Fortunately, current information technologies help reduce these risks and facilitate buyers to infer seller quality through various reputation mechanisms, such as buyer ratings and reviews, feedback systems, online discussion forums, etc. [3,22,35,39]. It is commonly believed that buyers are likely to pay price premiums to high-reputation sellers, so the high-reputation sellers should charge relatively high prices [3,22,25,38,39]. However, some studies find the reverse. For example, Ba et al. [4–6] identify the " adverse price effect, " which shows a seller may …