HKUST Business School Magazine

Biz@HKUST Biz@HKUST 48 49 // Cover // Insight I decided to join the KH program simply because it is the best. “ ” Michael Yue (Class of 2018) General Manager, Sales & Operation Google Hong Kong The Kellogg-HKUST EMBA Program is an exempted course under the Non-local Higher and Professional Education (Regulation) Ordinance Cap 493 (the Ordinance) of Hong Kong. It is a matter of discretion for individual employers to recognize any qualification to which this course may lead. Managerial and Policy Implications Our findings offer several managerial and policy implications. The fact that intense competition jeopardizes the effectiveness of a reputation system suggests the possibility that platforms can mitigate asymmetric information by entry restriction. By maintaining an appropriate level of competition, high-quality firms will have a strong incentive to participate in the market, offer a low introductory price, and build a reputation. This process, in turn, can increase the overall attractiveness of the platform. If the entry barrier is too low, excessive competition may cause each firm to receive few reviews and lose the incentive to provide a high-quality product. As a result, the platform may be filled with low-quality products and becomes less attractive due to adverse selection. For example, Taobao is often blamed for inferior and counterfeit products. 3 In contrast, Tmall, another e-commerce platform by Alibaba, sets up higher entry barriers and has grown much faster than Taobao in recent years. 4 Like online platforms, regulators and professional associations face a trade-off between promoting competition and the effectiveness of the reputation system. Inadequate competition results in high prices and reduces the variety of products, but excessive competition may worsen the asymmetric information problem. From a social welfare perspective, the desirable level of competition should strike a balance. Moreover, this optimal level of competition varies with the level of quality opaqueness. For goods with transparent quality, consumers can easily discover high- quality firms and transmit quality information to other consumers. In this scenario, intense competition is desirable from a welfare perspective. However, certain entry restrictions may be desirable for goods with strong quality opaqueness, especially for credence goods. For example, the American Medical Association restricts the number of physicians by means of licensing exams and certificates to maintain a high quality of medical practice. Therefore, platforms and regulators should take heed of the quality opaqueness of different product categories and set entry restrictions accordingly. Moreover, new sellers have a strong incentive to accumulate reviews than established sellers. On Taobao, many sellers often provide rebates to attract more consumers to experience the product and write reviews. 5 The platform can promote new sellers and curb the competition faced by them by granting special advantages in the recommendation system. High-quality new sellers are less likely to be buried if they become more visible with the help of the recommendation algorithm. Platforms have the natural incentive to develop better reputation systems. In the presence of competition between online platforms, the platform with a higher expected reputation is more attractive to both consumers and high-quality firms. Platforms should understand that quality opaqueness and competition are likely to interact with other factors during the process of quality inference and reputation building. Hence, for large e-commerce platforms carrying goods from vastly different categories, adopting a uniform rating and reputation system may not be desirable. For example, in markets with intense competition and opaque quality, the platform can take actions to reduce opaqueness by granting platform certification and posting experts' comments. The optimal design of the rating system and rating aggregation algorithm should also vary for different categories of products. References Fang, Limin. “The effects of online review platforms on restaurant revenue, survival rate, consumer learning and welfare.” Management Science (2021). Huang, Yangguang, Chenyang Li, and Si Zuo. “Building reputation on online platforms.” Working Paper (2021). Li, Lingfang, Steven Tadelis, and Xiaolan Zhou. “Buying reputation as a signal of quality: Evidence from an online marketplace.” RAND Journal of Economics (2020). Resnick, Paul, et al. “The value of reputation on eBay: A controlled experiment.” Experimental Economics (2006). 3 Fortune.com, Why Alibaba Can’t Complain About Its Return to the ‘Notorious’ Counterfeit Market List, Dec 22, 2016 4 Fortune.com, Alibaba Shows Resilience And Posts Blowout Revenue Growth Of 61% YoY, Aug 23, 2018 5 Li, Lingfang, Steven Tadelis, and Xiaolan Zhou. “Buying reputation as a signal of quality: Evidence from an online marketplace.” RAND Journal of Economics (2020).