Slides11_Reputation

Slides11_Reputation - The Information Economy Reputation 1...

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The Information Economy Reputation 1
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Reputation 2 Reputations are essential with experience goods Where experience good after buying Reputation performs two functions Allow people to learn about quality of product Discipline bad behavior Offline Long term relations, word-of-mouth, legal system Online reputation mechanisms eBay buyers and sellers rate each other Yelp customers review restaurants Peer-to-peer networks rate user‟s contribution to system
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Reputation Mechanisms 3 Information technology allows for precise management What type of information is solicited? When should it be solicited? How is information aggregated? What information is made available, and to whom? Examples Detailed information (surveys) vs. positive/negative? How filter out suspect reviews? Weight by trustworthiness? Provide recent reviews or entire history? (eBay vs. Yelp) Challenges Encourage participation Extract accurate, useful information Avoid strategic manipulation
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Theory 4
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Reputation and Learning 5 Reputation provides information about underlying quality Helps solve “adverse selection” Epinions , Amazon‟s reviews Example: Product is „high‟ or „low‟ quality with equal prob High product yields v=10 with prob ¾, and v=0 with prob ¼ Low product yields v=10 with prob ¼, and v=0 with prob ¾ First customer Willing to pay: Pr(high)U(high) + Pr(low)U(low) = $5 Second customer (if first liked product) Bayes rule: Pr[high|v 1 =10] = ¾ Willing to pay: Pr(high)U(high) + Pr(low)U(low) = $6¼ What if first did not like the product?
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Reputation and Discipline 6 Reputation punishes bad behavior Helps overcome “moral hazard” eBay rating, restaurant hygiene Example: Firm chooses „high‟ or „low‟ effort Cost of effort to firm: c H > c L Benefit of effort to customers: v
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Slides11_Reputation - The Information Economy Reputation 1...

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