Cyber Adverse Selection Phenomenon in the Internet Market in China: Model and Case Study

Abstract

Adverse selection means the selection by the consumer when faced with the circumstance of asymmetric information. The ‘cyber adverse selection’ phenomenon in Internet market hinders the healthy development of Internet market. Based on the adverse selection model put forward by American economist George Akerlof , who is one of Nobel Economics Prize laureates in 2001, this paper set up a cyber adverse selection model in Internet market . This paper takes data from Taobao.com in China as samples and demonstratively analyzes the characteristics of cyber adverse selection problems in Chinese Internet market. The results showed that reputation mechanism can effectively reduce the appearance of adverse selection, as well as electronic intermediaries and business alliance can offset adverse selection problems. The results also reveal that the cyber adverse selection in Internet market not only exists but also occurs more serious, which affects the function of Internet market. Finally, this paper offers some strategic thought and encourages sellers and buyers to trade credibly.