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About this paper
Hiroaki Chiba-Okabe, Joshua B. Plotkin
Chiba-Okabe and Plotkin developed a theoretical framework to model the evolution of trust in online marketplaces, demonstrating that profit-maximizing platforms have an inherent incentive to manipulate seller reputation systems, leading to rating inflation and a potential conflict with overall social utility.
Key insights
- Platforms possess an inherent incentive for 'rating inflation' (increasing the false-positive rate $\beta$) to boost transaction volume and revenue, especially when accuracy is costly or commission fees are fixed.
- The ability for platforms to freely set commission fees can mitigate rating inflation, as higher commissions incentivize investments in more accurate reputation systems (higher $\alpha$, lower $\beta$) to attract buyers.
- There is an intrinsic conflict between platform profit maximization and the social utility of buyers and good sellers, whose welfare generally benefits from higher market transparency.
Summary by alphaXiv.
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