Electronic markets are prone to informational asymmetries wherein one party knows more about the transaction than another. This might lead to a loss in market efficiency and a market failure. Reputation mechanisms, such as a feedback rating mechanism in which each buyer provides feedback about sellers is one way to minimize potential failure. The impact of a reputation mechanism is difficult to assess in natural markets or even field experiments, because several variables of interest are not under the control of the researcher. In this study, we use experimental economic methods, specifically the induced value theory, to control for buyer and seller values and study the impact of the reputation mechanisms on market efficiency and price premiums.
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