The Limits of Reputation in Platform Markets: An Empirical Analysis and Field Experiment∗

Reputation mechanisms used by platform markets suffer from two problems. First, buyers may draw conclusions about the quality of the platform from single transactions, causing a reputational externality. Second, reputation measures may be coarse or biased, preventing buyers from making proper inferences. We document these problems using eBay data and claim that platforms can benefit from identifying and promoting higher quality sellers. Using an unobservable measure of seller quality we demonstrate the benefits of our approach through a large-scale controlled experiment. Highlighting the importance of reputational externalities, we chart an agenda that aims to create more realistic models of platform markets. JEL D47, D82, L15, L21, L86 ∗We are grateful to many employees and executives at eBay without whom this research could not have been possible. We thank Dominic Coey, Andrei Hagiu, Ali Hortaçsu, Dimitriy Masterov, Carl Mela, and Glen Weyl for very helpful comments. †University of Chicago Booth School of Business and eBay Research Labs. Email: [email protected] ‡UC Berkeley Haas School of Business, NBER and eBay Research Labs. Email: [email protected]