The schemes proposed here increase the
knowledge of buyers about the quality (or even existence!)
of the items to be sold.
ness opportunity for an “intermediary” to come
in, receive the item before the auction, verify it,
and then put a seal of approval/authenticity of
that auction [ 2]. The seller would receive a better
price, which would be shared with the intermediary. The fact that such a service does not exist
raises some questions. Auction houses could also
make a feature that enables one entity to certify
another’s auction. Even having an apparent certification by such an entity is not a guarantee. 6
• A casual browsing of auction sites reveals that sellers often give blatant instructions not to check
out through the official auction checkout procedure. These sorts of circumventions should be
monitored and policed more effectively. It could
even be done in an automated way by searching
for keywords proposing to circumvent the checkout procedure.
• Some sellers offer money-back guarantees if the
buyer is not happy with the items he won. What
is lacking is a mechanism that actually enforces
that offer when a buyer is unhappy.
Advantages and disadvantages. The advantages
include a steep reduction in information asymme-tries at the expense of swindlers. Information asym-metries exist when one party does not know
everything relevant to a transaction that the other
party knows. The schemes proposed here increase
the knowledge of buyers about the quality (or even
existence!) of the items to be sold. The disadvantages
include greater transaction costs, even in the more
mild versions and the possible exclusion of some
buyers from the market (some buyers are willing to
take a chance on being swindled for a lower price—
those buyers would be priced out of a market in
which escrow was mandatory). One could imagine
an extension of this in which only auctions closing
above a certain dollar amount were forced to adopt
6Choicepoint is an example of a false and dishonest entity that appeared as a legitimate
business for a number of years.
some of these techniques.
Performance Bond. To open an account as a seller
or buyer, one needs a credit card. The auction house
should charge the seller an amount equal to the
amount of the sale (temporarily). Then, once the
buyer gives the go-ahead, the auction house would
reverse the charge. 7 Auction sites already do this on
the buyer side. The amount charged could also be
based on the seller’s reputation or other characteristics
of the seller (such as, how many prior items sold at the
current price range). This “seller escrow” would also
benefit sellers without an established reputation. If the
credit card transaction is rejected, than the auction
house knows that this is not a legitimate seller and will
remove his or her ID and items from the auction site.
The auction site would also know immediately that
they are probably dealing with a swindler.
The company would need to provide a cash flow
management guarantee (return your money within,
for example, one day), though, to protect those legitimate sellers who make a living selling on auctions.
Even so, most sellers would only take a one-day hit
because after the first day, they would be applying
their performance bond to future auctions.
Advantages and disadvantages. The performance
bond is a very strong level of protection and would
sharply increase trust in the system as well as sharply
reduce swindling. However, it is fundamentally a little
unfair as it requires sellers to be relatively well-off,
with enough credit on their credit card to pay for the
items they already own. If someone was auctioning off
items to raise money, say for a hospital bill, and they
were already in debt, they would not be able to participate as a certified seller under this system. An alternative could be some kind of certification by the
auction house for unusual circumstances, but this is
likely to fail for two reasons: the auction houses would
like to avoid certifying individual sellers for legal reasons; and the less “automated” the process, the more
7Some car rental and hotel companies use a similar method to protect themselves
against nonpaying customers.