Some of the most exciting developments in our economy right now are in the realm of electronic commerce. However, two major issues associated with asymmetric information in the online world still pose serious challenges to the growth of electronic commerce: one is the security concern on the Internet (Ford and Baum 1997; Garfinkel and Spafford 1997) and the other is the quality uncertainty problem (Choi, Stahl and Whinston 1997). While the former has been addressed by various technology developments such as digital signatures and digital certificates, the latter has not received much attention in the research community. Being more of a social and economic issue than a technology challenge, the quality uncertainty problem can severely cripple the development of electronic commerce. How can people promote the trust necessary for online exchange of products and services when individuals have short-run temptations to cheat? Using a game theoretic approach, we propose a design of an economic incentive mechanism that serves to encourage consumer confidence in conducting online business transactions.
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