The importance of online customer-to-customer (C2C) marketplaces has been growing and nowadays Taobao, the biggest platform in China, has 500 millions of registered users. Such platforms have a common inherent issue – the presence of asymmetric information and adverse selection problems, which obstruct trade. Fortunately, the online world allows buyers to leave feedback assessing how much they were satisfied with the bought items. However, it is not that easy. It turns out that feedback has one of the most characteristic aspects of public goods – everybody would appreciate it, but only a minority of consumers are willing to provide it.
Nevertheless, as Lingfang Li, Steven Tadelis, and Xiaolan Zhoushowed showed, if consumers are motivated to leave a feedback, they do so. As a result, information asymmetry is reduced. In particular, the authors studied roughly 7 million transactions made on Taobao between September 2012 and February 2013. As a measure to sweeten online shopping, Taobao introduced a “rebate-for-feedback” reward system. This mechanism allows sellers to offer part of the paid amount to be returned back to buyer if he or she met certain conditions and left a fine feedback (not necessarily a positive one). The authors’ main results suggest that high quality sellers are more likely to ask for a review and also the reviews tend to be of higher quality (measured as the length of the rating).
Reference: Li, L. I., Tadelis, S., & Zhou, X. (2016). Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace. NBER Working Paper, (w22584). Available here.