Information asymmetry and small business
in online auction market
Chia-Hung Sun Æ Kang E. Liu
Accepted: 17 November 2008 / Published online: 6 January 2009
Ó Springer Science+Business Media, LLC. 2008
Abstract This paper explores how seller reputation
affects auction prices using detailed Taiwanese data.
Our empirical results show that returns to reputation
are nonlinear and differ considerably across different
reputation scores. Marginal returns to scores drop
sharply after the ﬁrst reputation quartile, indicating
that building up sellers’ reputation is extremely
important, especially in the early stage. Our study
reveals that the mechanism of seller reputations is
effective in mitigating asymmetric information in
Keywords Internet auction Á Buy it now Á
Spline regression Á Taiwan
JEL Classiﬁcations D8 Á D44 Á L26 Á L86
Small businesses and entrepreneurship are the most
important parts of the industrial world, as shown in
2004 whereby more than 99% of all companies in the
USA were small businesses. Entrepreneurship has
become a better option for people to increase income
on their own and to improve their quality of life.
Moreover, the changing economy (globalization,
increased competition, and advanced computer tech-
nology) fertilizes the business environment for
entrepreneurs. The dramatic growth of Internet usage
has especially changed consumers’ purchasing
behavior and hence has created enormous potential
opportunities for entrepreneurs.
The rise of eBay and several other Internet auction
sites provides channels for individuals and small
businesses to trade goods at real-time market prices
around the globe.
With almost no setup costs, an
Internet auction offers instant product exposure and
global marketing for entrepreneurial sellers to achieve
a great advantage over other marketing strategies.
Despite growing at an impressive pace, the increase in
Internet scams should come as no surprise. According
to Internet Fraud Watch’s 2006 report, Internet scams
of online auctions (mainly goods never delivered or
misrepresented) ranked at the top of overall com-
plaints, accounting for 34% of total complaints, and
the average loss was US $1,331.
C.-H. Sun (&) Á K. E. Liu
National Chung Cheng University, Min-Hsiung,
Chia-Yi, Taiwan, ROC
For instance, one online auction site (www.ebay.com.au)is
the primary source of income for more than 17,000 Australians,
according to The Australian newspaper (March 17, 2007).
Internet Fraud Watch’s website: www.fraud.org/internet/
Small Bus Econ (2010) 34:433–444