Caveat Emptor: Differences in Online Reputation Mechanisms

Using a unique dataset from a specialty online retailer, we are able to compare the effectiveness the of Amazon and eBay online reputation mechanisms. We develop a structural model of online order generation process, feedback generation process and price formation process. Results from our structural model suggest significant differences on how feedback affects total sales and how different types of order processing errors and consumer returns of ordered products influence consumers proclivity of provide feedback. We find feedback affects sales on the Amazon platform but not on the eBay platform. Products returns lead to significantly higher numbers of negative feedback, but processing errors at eBay perversely increase the number of positive feedback. Structural models suggest that the eBay feedback mechanism is neither effective nor is the process is intuitively interpretable. We then conduct an exploratory analysis to determine the causes for the differences between these two platforms, and conclude that the majority of the difference is due to the reciprocity effect. JEL Classification: D44, L14, L86