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Maintaining vs. milking good reputation when customer feedback is inaccurate
Behnud Mir Djawadi1, René Fahr1,2, Claus-Jochen Haake3
1Department of Management, Paderborn University, Paderborn, Germany.
Plos One
|November 13, 2018
Summary
Reputation systems in online transactions can be undermined by customer errors. Theoretical models suggest providers should ignore reputation, but experiments show they exploit good reputations for short-term gain.
Area of Science:
- Economics
- Behavioral Economics
- Information Economics
Background:
- Online transactions often involve anonymous interactions, creating information asymmetry.
- Reputation systems are crucial for mitigating deception and informing customers about service quality.
- Customer judgment errors can complicate the effectiveness of reputation mechanisms.
Purpose of the Study:
- To analyze the impact of a reputation system on service quality decisions.
- To investigate how customer errors in evaluating quality affect provider strategies.
- To compare theoretical predictions with experimental findings on reputation management.
Main Methods:
- Developed a theoretical model of strategic quality choices by service providers.
- Incorporated customer rating errors into the model.
- Conducted an experimental design to test the theoretical predictions.
Main Results:
- Theoretical model predicts provider quality decisions are independent of reputation profiles.
- Experimental results show providers deviate from optimal behavior, using "milking strategies".
- Providers exploit good reputations by offering low quality at high prices, then switching to high quality.
Conclusions:
- Customer errors in assessing service quality can lead to suboptimal provider behavior.
- Reputation systems may not function as intended when providers employ exploitation strategies.
- Further research is needed to understand and mitigate reputation "milking" in online markets.
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