Can “Gold Medal” Online Sellers Earn Gold? The Impact of Reputation Badges on Sales

Abstract

Reputation systems have been an important component for improvement of online markets’ efficiency by reducing uncertainty about the quality of the sellers. Most, if not all, reputation systems examined in the extant literature reflect the sellers’ long-term accumulative reputation, which has several drawbacks that impede accomplishing the intended goals of the reputation systems. Taobao.com, the largest consumer-to-consumer online market in China, implemented the Gold Medal Seller (GMS) program as a concurrent reputation mechanism to enhance its existing long-term accumulative reputation system. The GMS program presents a backdrop that allows us to address several intriguing research issues not empirically examined in prior literature. By adopting multiple causal identification strategies, we find that earning a reputation badge has a positive impact on sales, and losing a reputation badge has a negative impact on sales. More importantly, the signaling value of obtaining/losing a reputation badge is asymmetric: The magnitude of the effect of losing a reputation badge is four times larger than that of earning a badge. Moreover, consecutively keeping a reputation badge or earning it multiple times is a stronger signal for seller quality and has a larger positive impact on sales, which suggests that the marginal value of reputation badges increases. Our findings offer a new and deeper understanding of the reputation system mechanism design.