The Digitization of Word-of-Mouth: Promise and Challenges of Online Reputation Systems

Online reputation mechanisms are emerging as a promising alternative to more traditional trust building mechanisms, such as branding and formal contracting, in settings where the latter may be ineffective or prohibitively expensive; a lot of electronic trading communities fall under these categories. Although a number of commercial websites already employ various forms of reputation mechanisms, rigorous research into their properties is still in its infancy. This fledgling field can benefit from past results in economics and game theory. Moreover, in order to translate the stylized results of game theory into concrete managerial guidance for implementing and participating in effective reputation mechanisms further advances are needed in a number of important areas: First, the design space of such mechanisms needs to be scoped and the effects of different design choices on performance need to be better understood. Second, the economic efficiency of various classes of reputation mechanisms needs to be quantified and compared to that of alternative mechanisms for building trust. Third, the robustness of those mechanisms against boundedly rational players, noisy ratings and strategic manipulation needs to be studied and improved. This paper surveys past results that have been derived in a variety of contexts, but which are relevant as a basis for building online reputation systems, presents two analytical models that illustrate the role of such systems in electronic markets and identifies opportunities for further MS/OR research in this fascinating area. 1 Preliminary draft of December 10, 2001 for comments and discussion. Please do not circulate.