Article in a working paper series:
It is shown that if there is adverse selection on seller's ability in experience goods market, credible communication can be sustained by reputation motives in spite of the inherent conflict of interests between sellers and buyers. In the absence of "commitment" types, reputation motives are explained as a consequence of equilibrium interplay between the market's perception on a seller's ability to deliver quality and the level of trust it places on the information he provides. Moreover, reputation motives do not disappear even after the seller's ability is revealed. This model is applied to examine the extent to which consumer rating systems may discipline sellers in honestly informing buyers about the quality of their product. Also analyzed is the impact of the possibility that sellers may restart as new traders by obtaining new identities.
Industrial Organization, Regulation and Competition Policy
C73: Stochastic and Dynamic Games
D82: Asymmetric and Private Information
D83: Search, Learning, and Information
L14: Transactional Relationships; Contracts and Reputation