It is well known that the reputation is the basis of a seller to survive and gain trust from customers in a competitive business environment. But as the existence of information asymmetry between buyer and seller, the moral hazard problem is the key obstacle that impedes the benefits of related shareholders and reduces the efficiency of total market. It is crucial to design a control mechanism to avoid the negative impact of moral hazard. This paper studies the principal and agent relationship between buyer and seller in C2C e-market; because of the influence of information asymmetry, many customers suffered from being cheated by sellers with defective products in practice. These frequent cases will deteriorate long term relationship between sellers and buyers. Here we focus on the analysis of the causes of moral risks and the effect of reputation on oral risk with repeated game theory. The purpose of this paper is to help both firms and customers effectively avoid morality risk and realize a win-win situation.
C2C e-commerce plays an indispensable role in the Electronic Commerce market in China and the total transaction value is estimated to be 607 billion in 2014 [
In this paper, we will focus on the problem of moral hazard between the seller and buyer in C2C market and potentially intend to help solving the problem. One popular way is to introduce reputation to track the past behavior of seller [
Our primary research question is how the expected profits of the seller and the buyer depend on these two factors, one is the type of the seller, and the other is the reputation of the seller from the buyer. For example, does the seller always benefit from cheating or not. To answer this research question, we will examine a market where the reputation mechanism exists and check the influential mechanism. In this paper, we will set the reputation model of the seller in C2C E-Commerce market. We first characterize the situation that the type of seller is not common knowledge and then demonstrate that even though cheating has a direct benefit to the seller, it can sometimes hurt the seller, buyer, or both if the deal goes in the long run. Furthermore, we show the impact of reputation. In addition, we illustrate that the seller will always choose to be honest when the mechanism of reputation works. In a typical game-theoretic view of the relationship between buyer and seller, each player acts in order to maximize its own profit (rational player) without taking into account the overall optimal. Thus, incentive is offered to influence the behavior of the other one. Such an incentive is reputation.
This paper proceeds as follows: In Section 2 we review related literature. We then present the model in Section 3. We analyze the model to explain the existence of moral hazard and the coordination mechanism of reputation respectively in Section 4. Finally, we discuss extensions of our paper and provide our concluding remarks in Section 5.
C2C e-commerce specifies all business activities related to all buyer and buyer, like e-bay and TaoBao. There are many advantages like lower price, better service of C2C e-commerce, the main difference between C2C e-commerce is that the relationship between the seller and the buyer could be switched. The possibility of the occurring of lemon market means the reputation is also one aspectneed to be considered.
As a potential motivation, reputation could inspire seller to increase service quality. Since Adam Smith, reputation has been regarded as a very important mechanism to guarantee the implementation of contract in Economics [
The earlier research about reputation comes from economic, which emphasized the constraint of the agency market to the behavior of agency. As they are living in a competitive market, the potential value of the agency is determined by his past performance. The agency who cares about his reputation will be responsible for his behavior even there is no explicit motivational contract, they would work hard to increase the level of reputation, hoping they will gain more in the future.
Later researchers started to connect the reputation and the incentives of seller to build a complete model [
The reputation model KMRW also proves that when the payoff of one player is not known by the other, this player has the incentive to build a good reputation to exchange for long run benefits [
Among the few works that study the impact of reputation on the moral hazard behavior, KMRW model is the most relevant to this study. They consider a market with a seller and a buyer in a setting that both of them are customers, but without considering demand. Considering the demand uncertainties and information asymmetry [
There are mainly three forms of moral hazard [
In the setting of repeated game, we consider a market where both the sellers and the buyer are customers, which is quite popular in the real practice. There are two possible types of the seller, with the probability
Our model is on base of Ma (2005) that the integrity trade rate(the percentage of the honest trade among all trade), here the cost of seller with good reputation and bad reputation to take the action of being honest and dishonest is denoted as follows: CSG and CFG, CSB and CFB. “S” denotes the seller choose to be honest while “F” denotes the seller choose to be dishonest. “G” denotes the type of seller is good, while “B” denotes the type of seller is bad. As the seller of low reputation will have more management cost and more future risk, additionally, the seller with bad reputation is more familiar with cheating with the buyer, so here
Assumption 1:
The information asymmetry in C2C e-business is reflected by that the seller knows his type while the buyer lack of knowledge about it. As is shown in
Assumption2: Suppose the unit value of the product provided by the seller within some periods values
is
Assumption3: The times that the buyer will purchase from the seller is stable to a constant
Assumption4: The sequence is as follows. Firstly the buyer will decide how many times to buy from this seller, then the seller will decide its service level.
The seller mainly benefits from the commission from purchasing times , that is
The purpose of introducing service level of seller is to reduce the risk of buyer, to maintain its benefits of buyer and guarantee the efficiency of market. Therefore the optimal service level to maximize the total benefit in C2C market should be:
But as the first decision the buyer make is to choose the buying times from a specific seller, next the seller will decide its service level. Here βm is a constant, as a rational person, the seller will take following actions:
In the case of single business, the seller will choose dishonest to maximize its own profits no matter what type it belongs to, and the buyer will not make a deal with seller after considering that, so this market does not exists. In the case of repeated business, the buyer will make decision on base of past shopping experience. As repeated game change the constraint mechanisms, the payoff of both parties will be different, so new equilibrium exists.
In the 1st business, the buyer thinks that the seller belong to good reputation, so the expected payoff of buyer is
In this model, we suppose P1 > P/V, the payment at the first stage of seller, here introduce a discount rate
The total payoff of the seller is:
Then considering the case when the seller of bad reputation try to hide its type firstly to gain the credibility of the buyer, in order to gain more benefit in the following deal, then the strategy of the buyer is (Deal, Deal), the total pay off of the seller is:
When the seller choose to not cheat at the first deal, then
Similarly, we could calculate corresponding threshold value
From the assumption that
After the game theory analysis, we can conclude, the seller in C2C market has the incentive to maintain its reputation in order to gain more profits in the future. That also accounts for the reasons why the seller will invest more on after sellers training, improving customers service level, caring about the quality of product and the comments of finished customer, is to keep a longer seller-buyer relationship.
As lack of well-designed evaluation system targeted at Chinese C2C e-market, the problem of moral hazard could not be avoided or solved thoroughly. The integrity between trade partners is the basis of E-business, so it is necessary to appeal to all partners participating in E-Commerce website, both buyers and sellers and the government to work together, to push the development of evaluation system on base of reputation, to connect the benefits of sellers with its reputation, to increase the cost of irregular actions in the E-market. Generally speaking, there are following actions that can be taken to realize the function of reputation as a credible signal. Firstly, from standpoint of the online platform, it is advisable to complete the systematic rating system in the market; Secondly, from the governing of the government, it is also helpful to regulate the market by taking actions to strengthen the implementation of identity recoding and reputation supervision; Thirdly, the success of completing the evaluating system to sellers heavily depends on the efforts imposed by customers who would like to join in the activity of evaluating the ratings of sellers.
Potential extensions of our work include the study of e-commerce with one seller and many buyers, or many buyers buying the same product from many sellers. Furthermore, advanced reputation constraints could be examined for e-commerce that exhibit additional complexities (e.g., multiple echelon inventories) [
FangjunMu, (2015) The Effect of Reputation to the Moral Hazard in C2C E-Market with Game Theory. American Journal of Operations Research,05,367-372. doi: 10.4236/ajor.2015.55030