eBay and feedback mechanisms

How do we design optimal feedback mechanisms? This is the question raised by eBay's decision to ban sellers from leaving negative or even neutral feedback about buyers.
Superficially, this seems daft. If all buyers, good payers and bad, are rated equally, useful information is lost - as it is when exams give all students top marks.
So, why's eBay restricting negative ratings? Two reasons:
1. People are gaming the system. A seller who gets a bad rating can retaliate by giving the buyer a bad reputation. Knowing this, buyers don't give sellers bad ratings. That means sellers of tat who are slow to deliver end up with inflated reputations. And this costs subsequent buyers money, because sellers with good reputation can command higher prices. This paper (pdf) by Daniel Houser and John Wooders estimates that a 10% rise in the number of negative or neutral ratings a seller has cuts prices by 0.24%.
If sellers can't retaliate, buyers have more incentive to give bad ratings to bad ones.
2. The information conveyed by buyers ratings doesn't affect prices, according to the Houser and Wooders paper. So grade inflation on the buyers' side doesn't destroy price-relevant data, on average.
So, eBay aren't being completely daft. But could they do better? These two papers suggest yes. A better solution might be to prevent buyer and seller knowing how the other has rated them before making their ratings. This would prevent tit-for-tat negative ratings.

Comments

[pratima]

"A better solution might be to prevent buyer and seller knowing how the other has rated them before making their ratings."

- I'm not so sure. I would suspect that a bad seller might preemptively give the buyer a bad rating since the sellers only feedback is his perception of whether he has been a good seller.

[ebay no more]

I realize this is merely anecdotal, but eBay is dead to me ever since I bought nightmare car from a "powerseller" with a 98+ rating only to later learn they had solid "F" rating with the BBB. That should not be possible.

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