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.