All Commentary
Sunday, April 1, 2001

Regulation by Reputation on the Net: Business

Seller Reputation Is a Significant Determinant of Price in Online Auctions

Aaron Steelman is a writer in Falls Church, Virginia.

When I started collecting sports cards in the early 1980s, there were basically two places to purchase memorabilia: at shops owned by veteran collectors and at shows where dealers from around the country would rent tables to display their goods.

Today, the hobby is different. There are still shops and shows, and like thousands of other collectors I continue to go to them. I do so for three reasons. First, I like to talk to people in the hobby. Second, I enjoy looking at rare cards and autographs, even if I have no intention of buying them. Third, at most large shows, there are star players from the past signing autographs; it is a thrill to meet them.

But shops and shows are no longer essential. One can be an active collector without ever leaving home. The reason: online auctions.

In December 1999, I became a registered user on eBay. Since then, I have purchased dozens of cards from sellers across the United States and Canada. Some transactions have been better than others. But so far, I have not had what I would call a “bad” transaction. In short, eBay’s reputation system has worked well. Let me explain.

When a user visits, he typically goes to the search engine and enters the item he wants. For example, I might type “Gordie Howe.” All Gordie Howe items will then be listed, and I will click on the items that most interest me. The current bid price, the date and time the auction closes, the location of the seller, and the terms of the sale (for instance, the shipping costs and the forms of payment accepted) will be stated.

In addition, one can look at the seller’s “feedback”—that is, how previous buyers have rated their transactions with the seller. Buyers can rate transactions as “positive,” “neutral,” or “negative.” They can also post short comments to provide more detail about their experiences. For instance, a buyer posting a negative comment might state that it took a month for his item to arrive or that it was damaged because the packaging was poor. In addition, sellers can post feedback about buyers. For instance, if a bidder reneged, that will almost surely be reported. Future bidders and sellers use this feedback as a guide.

Usually, I bid on items from sellers with very good reputations. If a seller’s positives don’t outnumber his negatives by 15 to 1, I tend to steer clear. But not always. I have bid on a few items that were offered by sellers with less than immaculate feedback. But my bids reflected the higher risk that I was taking. In short, I bid less than I would have had the seller’s reputation been better. From participating in many auctions and observing even more, I have found that most bidders employ a similar strategy.

Daniel Houser and John Wooders, economists at the University of Arizona, have looked at this issue empirically. Their findings are consistent with my anecdotal experience: “seller reputation (but not buyer reputation) is a statistically and economically significant determinant of auction prices.”* What we have, then, is regulation by reputation. And the system works quite well for most eBay users.

I should note one more thing. Private third-party certifiers, such as Professional Sports Authenticator (PSA) of Newport Beach, California, have been crucial to the sale of sports cards on the Web. The value of sports cards is, in large measure, determined by condition. A card in “mint” condition may be worth 100 times more than the same card in “fair” condition. So it is important for online buyers to be confident that the cards they are purchasing are actually in the condition that sellers claim. For a fee, PSA will verify the authenticity of cards and rate their condition on a 1-to-10 scale. The cards are then placed in sealed plastic cases with identification numbers. Over time, PSA has gained a reputation as an accurate and impartial evaluator of memorabilia. As a result, PSA-graded cards command a premium when sold online. Greg Manning, a veteran dealer from West Caldwell, New Jersey, put it this way in an interview with Sports Collectors Digest: “Professional grading allows a buyer the comfort of knowing that the card you are purchasing is authentic, unaltered and in the condition you are searching for.”

PSA, then, performs a function for sports-card collectors similar to the one performed by Underwriters Laboratories for consumers of appliances and electronics.