Seller rating, price, and default in online auctions

Whereas in brick and mortar stores quality and seller reliability can be effectively communicated through a variety of quality cues, in the online world different mechanisms help sellers establish reputation and trust. Among the commonly used mechanisms by infomediaries that screen and rate sellers are customer-feedback reputation mechanisms where buyers provide seller ratings and feedback. The success of such mechanisms and their impact on prices in electronic markets are described and empirically investigated in this work. Specifically, we investigate both theoretically and empirically (1) whether seller ratings affect consumer valuations, particularly in the presence of insurance; (2) whether seller ratings are indicative of future default likelihood; and (3) whether a seller who is terminal (about to go out of business) is more likely to default prior to exiting.