Product Quality Uncertainty in Online Auction Marketplaces: Overcoming Adverse Product Selection with Price Premiums

To overcome a market of ‘lemons’, online auction marketplaces must be able to differentiate among products and generate price premiums for high-quality ones. Still, the literature has only focused on seller quality uncertainty (seller reputation), alas ignoring the role of product quality uncertainty, which is defined as the degree by which the outcome of the transaction cannot be accurately predicted due to fears that product quality may differ from what is expected. This is especially problematic for used products where product quality uncertainty is often greater. To overcome adverse product selection, this study first introduces four product-related variables (inspection, warranty, value, and attributes) that impact price premiums, and it also proposes their interaction effect with seller reputation. The proposed model will be tested with secondary data from used cars on eBay Motors. Implications for mitigating product quality uncertainty and preventing a market of ‘lemons’ are discussed.