The Merchant's Dilemma on eBay: Using Reputational Techniques to Model a Competitive Market

Abstract

A firm in a competitive environment, that is able to cheat consumers, wishes to maximize profits. This firm has a current incentive to cheat consumers to make additionally revenue. But if the firm builds a reputation for cheating it will not be able to charge as high a price for its product and consumers may avoid it. If firm reputations are sufficiently high there will be an equilibrium where the top firms hold a monopoly over the market and will never be forced to drop out. However, for lower firm reputations, firms are willing to produce in such a way that lower reputation firms may be able to join the cadre of top firms.