Adverse Selection Behavior and Counteracting Mechanisms in E-Commerce Market: Case Study from Taobao.com（China）

Abstract

Adverse selection refers to a market process in which undesired results occur when buyers and sellers have asymmetric information; the bad products or services are more likely to be selected by consumers. Compared to the traditional market, the e-commerce transaction still could not get rid of the adverse selection problems，which seriously affect network online consumer buying behavior and reduce the efficiency of the online transaction. Now in China some trading platforms such as Taobao.com（China）are seeking some counteracting mechanisms to reduce adverse selection problems. Widely used mechanisms are credit scoring mechanism and guarantee mechanism. This paper takes transaction data from U disk market in Taobao.com as samples and analyzes the role of credit scoring mechanism and guarantee mechanism in Chinese e-commerce market. The results showed that the credit scoring mechanism and guarantee mechanism can effectively offset the negative impact from the adverse selection problems. Although the credit scoring mechanism has a significant impact on transaction volume; guarantee mechanism has greater impact on the trading volume than the credit scoring mechanisms. In addition, relationship between the guarantee mechanism and credit scoring mechanism are not substitutes but complement for each other. In the case of the existence of the guarantee mechanism, online consumers’ purchase for online goods options is still subject to the impact of the credit scoring mechanism. The paper proposes strategy recommendations to improve credit scoring mechanism and guarantee mechanisms to promote the efficiency of online transactions.