Lemons on the Web: A Signalling Approach to the problem of Trust in Internet Commerce

Asymmetric information is at the heart of situations involving trust. In the case of B2C Internet commerce, the information asymmetry typically relates to the difficulty that consumers have of distinguishing between “trustworthy” and “untrustworthy” Web merchants. The impasse can be resolved by the use of signals by trustworthy Web merchants to differentiate themselves from untrustworthy ones. Using an experimental design where subjects are exposed to a series of purchase choices, we investigate three possible signals, an unconditional money-back guarantee, branding, and privacy statement, and test their efficacy. Our empirical results confirm the predictions suggested by signalling theory.