Internet Exchanges for Used Goods: An Empirical Analysis of TradePatterns and Adverse Selection

The past few years have witnessed the increasing ubiquity ofuser-generated content on seller reputation and product condition inInternet based used-good markets. Recent theoretical models of tradingand sorting in used-good markets provide testable predictions to use toexamine the presence of adverse selection and trade patterns in suchdynamic markets. A key aspect of such empirical analyses is todistinguish between product-level uncertainty and seller-leveluncertainty, an aspect the extant literature has largely ignored. Basedon a unique, 5-month panel dataset of user-generated content on usedgood quality and seller reputation feedback collected from Amazon, thispaper examines trade patterns in online used-good markets across fourproduct categories (PDAs, digital cameras, audio players, and laptops).Drawing on two different empirical tests and using content analysis tomine the textual feedback of seller reputations, the paper providesevidence that adverse selection continues to exist in online markets.First, it is shown that after controlling for price and other productand seller-related factors, higher quality goods take a longer time tosell compared to lower quality goods. Second, this result also holdswhen the relationship between sellers’ reputation scores and timeto sell is examined. Third, it is shown that price declines are largerfor more unreliable products, and that products with higher levels ofintrinsic unreliability exhibit a more negative relationship betweenprice decline and volume of used good trade. Together, our findingssuggest that despite the presence of signaling mechanisms such asreputation feedback and product condition disclosures, the informationasymmetry problem between buyers and sellers persists in online marketsdue to both productbased and seller-based information uncertainty. Noconsistent evidence of substitution or complementarity effects betweenproduct-based and seller-level uncertainty are found. Implications forresearch and practice are discussed.