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 problem.

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 crook.

• 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 messages.

• Putting the name of a company and the word “fraud” or “scam” into a search engine like Google.

• Check with the Chamber of Commerce and Better Business Bureau regarding the company.