likely that actual swindlers would be able to pass off
as legitimate customers. A third alternative could be
the encouragement of third-party certifiers (or surety
bond companies) such as BuySafe, which certify sellers for a commission—paid by the seller on items
sold—and promise to compensate buyers if there is a
Insurance. Appropriate insurance policies could
encourage electronic commerce activities. Premia
should be reasonable, and mechanisms designed to
reduce or prevent collusion. The way it would work
would be that the buyer would pay a premium to the
insurance company and if there is a problem, the
buyer makes a claim and is reimbursed. Here are a few
possible recommendations for insurance:
• Insurance by payment beforehand. At the
moment the auction is consummated, the buyer
is charged a premium based on the seller’s reputation and the category. These are both known in
advance and so could be prominently advertised
within the auction itself while it is going on. The
buyer would pay the premium, although there
would be nothing preventing the seller from subsidizing or even paying the premium him- or herself, just as some sellers pay for shipping.
• Insurance companies should be certified by the
auction house, with recommended insurers
linked directly from the auction house.
• Insurance premium size should be tied to the
level of fraud in the category and the past reputa-tion/insurance claim activity related to the seller.
Insurers would then have the tools to go after
swindlers and to increase the cost of being a
• Another option is that the seller would be
required to take out the policy.
Advantages and disadvantages. Smarter insurance
policies would make the market fairer, especially if
taking out a policy were mandatory. It would be fair
because buyers would be hedged against absolute
fraud and would not lose their money. In addition,
the market for insuring fraud would become more
efficient, because there are relatively few insurers and
they would be scrutinizing the antecedents of fraud
and pricing the risk accordingly as their own money
would then be on the line if they are wrong. The disadvantage is that on the margin, the increased transaction cost would exclude some buyers. In addition,
there could be a moral hazard problem in that buyers would be participating in riskier auctions (ones
they estimate might have a fraudulent outcome) but
they do not care as much because their insurance
coverage provides a safety net.
Regulatory control. State or federal governments
in the U.S. and elsewhere may want to make sure that
the auction houses follow the rules set in their own
descriptions of the mechanisms. There is a need for
an agency that confirms they follow without bias the
rules they advertise. Auction houses have at their disposal the ability to take advantage of situations in
which they can make extra money at the expense of
sellers and/or buyers, just as a real estate agent could
conceivably buy and then resell a house rather than
showing it to a potential buyer. We are not claiming
that auction houses intervene in the auction markets
frequently, but in fact who would know if they did or
did not? Are the auction houses completely neutral?
Some sort of government oversight might be helpful
in this area.
In return for submitting to regulatory control (and
for taking some proactive steps toward reducing fraud
as outlined in this article), we propose that auction
houses could be shielded from some forms of legal liability in fraud prevention. It could be that auction
houses have resisted any action up until now for fear
of legal reprisals, in other words, if they pursue better
escrow or insurance policies, that might be considered
an admission of guilt and open them up to lawsuits
by unhappy auction winners.
Advantages and disadvantages. Without any a priori
knowledge of biased interventions in their own auctions, we are not certain that instituting government
oversight will create more problems than it solves.
Still, adding government oversight will make the
entire system more transparent. Further, if auction
houses could be shielded from some legal liability
through an oversight process, it might give them
incentives to implement anti-fraud policies rather
than simply claim they are a neutral market and are
not at all responsible for members’ trades.
Buyer precautions. There are many tools available
on the Internet to help either party verify the information given by a seller. Examples:
• Auction houses should ask a buyer (and seller)
during the registration process to provide a
phrase/code that is known only to them. Any
email message coming from the auction house to
him should have that phrase displayed in it. This
enables the buyer (or seller) screen out fraudulent
• Putting the name of a company and the word
“fraud” or “scam” into a search engine like
• Check with the Chamber of Commerce and Better Business Bureau regarding the company.