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When Safety Measures Boomerang for Online Auction Sites

Having too many protections puts buyers off by getting in the way of good deals.

Title: The Boundaries of Trust and Risk: The Quadratic Moderating Role of Institutional Structures (Fee or subscription required.)

Authors: David Gefen (Drexel University) and Paul A. Pavlou (Temple University)

Publisher: Information Systems Research

Date Published: December 2011

Online auction sites have invested a considerable amount in features that seek to reassure customers that their transactions will be conducted safely. Fostering consumers’ trust and reducing their perceived risk have been widely identified as key components of building a successful Web-based commercial brand.

But these companies may be going too far in their safeguarding efforts, this paper finds. At some point, extra protections become irrelevant to some consumers and off-putting to others, who see the safety mechanisms as barriers that impede the deal-making process.

“Online marketplaces may have over-invested in institutional structures to build buyers’ trust and reduce their risk from sellers,” the authors write. In putting up their line of defenses — including the use of third-party escrow companies such as PayPal and lists of terms and conditions that consumers must agree to before transacting — the sites have underplayed the importance of fostering informal social exchanges, the authors say. Conducted through online forums and other venues, these exchanges provide buyers with tips and lubricate buyer–seller transactions. The result is that the safeguards, which are expensive to build and maintain, appear to be costing the companies potential online income.

Indeed, the authors’ analysis, which was based on surveys of auction-site users, uncovers a “sweet spot” of trade-offs between security measures and social activity that managers of auction sites should strive for but that they now rarely attain. In fact, when safeguards and transactions are tracked together, the average level of safeguards at the two biggest online auction sites, eBay and Amazon, is about 25 percent higher than the peak of transaction activity. This means that those sites are leaving money on the table because, as the authors write, “enhancing transaction activity even by a small margin can have tremendous implications for increasing actual transaction volume and market liquidity.”

The online auction sector, long identified with eBay, has recently been attracting many other players. Yahoo and Google, like Amazon, have launched auction services, wherein both individuals and retailers put goods and services on the block. Ticket-buying services like StubHub, numerous car-related sites, computer vendors, antiques dealers, travel agencies, and even charitable organizations like Goodwill and the Salvation Army are now in the online auction business.

When making purchases online, the authors posit, the main issues consumers consider are risk (the potential economic loss they could sustain if the sites aren’t protected effectively) and trust (how much confidence in and interaction with sellers they have).

To explore how well companies are doing on both fronts, risk and trust, the researchers collected data from eBay and Amazon, which together account for more than 90 percent of the online auction market. The two companies use many of the same safeguards and features. In addition to third-party escrow services and certain rules for buyers and sellers, these safeguards include credit card guarantees that protect customers from fraudulent or problematic transactions and feedback mechanisms that seek to provide accurate ratings and histories of users. The two companies also are about the same size, have significant overlap in their products, and have similar customer demographics.

The biggest players were chosen because the authors wanted to focus on marketplaces with solid institutional structures in place so that a sufficient number of buyers could be tracked over the course of a year.

Other online marketplaces are either small or specialized, raising concerns about the broader applicability of their data, according to the authors. As for online marketplaces with weak institutional structures, these sites “are unlikely to foster a high volume of transaction activity, thus making it difficult to identify active buyers who are likely to continue transacting in the future,” the target group of the study.

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