INFORMATION ASYMMETRIES IN E-COMMERCE: THE CHALLENGE OF CREDENCE QUALITIES.

• Author: Shchory, Noga Blickstein

1. Introduction

   E-commerce is becoming an increasingly significant part of the modern economy. (1) According to recent reports, the U.S. retail e-commerce market is almost the largest in the world (second only to that of China), estimated at $513.6 billion in 2018, which is approximately 9.7% of all U.S. retail commerce. (2) Consumers regularly use the internet to gather product information, (3) and participation in e-commerce is constantly increasing. (4) The development of e-commerce encompasses great promises, such as the promise of efficiency, allowing sellers to propose almost any commodity for sale with considerably reduced costs, and allowing consumers to do all their shopping at home from a computer, laptop, or mobile device with a single click or touch of the screen. (5)

   This Article focuses on the promise of information growth, arising from the almost unlimited wealth of data produced in e-commerce. Today, endless commercial information is presented to consumers, and it can be easily transferred around the globe from a proliferation of sellers to an unlimited number of buyers with incredible speed and volume. (6) This information may be displayed by text, picture, or video. (7) Simultaneously, each and every browse--including but not limited to purchases--may be recorded for further analysis by the website or by others. (8) The data produced by both sellers and consumers may be stored, analyzed, and used for commercial or other purposes. (9)

   With the growth of information, scholars in the fields of sociology, organization theory, psychology, business management, and others have recognized the information overload effect that magnifies the difficulty of processing information and thence arriving at a decision. (10) Terms such as information overload, data smog, information glut, infobesity, and intoxication have proliferated both in scholarly and popular writing. (11) This Article adds to that literature by recognizing the focusing on an opposite problem: information absence in the age of information proliferation. The research argues that not all types of commercial information are at consumers' fingertips, as could be expected.

   Properly identifying where information is abundant and where information is still missing is important for guiding policy makers. (12) Changes in data availability have the potential to change the information balance between parties in a commercial transaction, thereby affecting consumer welfare. (13) Indeed, in accordance with economic theory, for markets to function properly and maximize consumer welfare, sellers must offer consumers a wide range of products, and consumers should be able to properly exercise their choice between these products. (14) For consumers to do this, they must acquire appropriate information. (15) If such information is unavailable and the regulator deems that information to be important for the consumer's decision-making process, consumer protection laws step in. (16)

   This Article analyzes the effects of e-commerce on the information balance between sellers and consumers, highlighting the special challenges of information regarding credence qualities, and making policy recommendations to remedy them. The argument is developed as follows:

   Part II opens with a short review of the economic literature that guides the ensuing discussion, presenting the economic principles regarding both information absence and information overload and emphasizing the particular overload problems of e-commerce. (17)

   Part III focuses on the distinction between three types of product qualities that might be relevant to consumer choice: search qualities, which relate to product features that can be detected prior to the purchase; experience qualities, which are product features that can be detected only after the purchase; and credence qualities, which are product features that are unverifiable because they might never be detected. (18) Credence qualities can include, for example, ethical characteristics of the production process, the probability of a product malfunction, the accuracy of the product's label, and so on. (19) Unlike search and experience qualities, credence qualities are not discovered in a systematic manner; they are only uncovered accidently. (20) As a result, the free market can rarely correct against low-quality sellers that provide fraudulent credence information. (21) Therefore, regulatory intervention is necessary to provide consumers with accurate credence information. (22) The analysis reviews how the growing connectivity between the internet and commerce affects the availability of information relating to each of these qualities, taking into account both the problem of information absence and that of information overload. In essence, it will be argued that while the availability of information relating to search and experience qualities has improved, e-commerce consumers remain at a relative disadvantage with regard to information about a product's credence qualities. (23)

   Part IV identifies a new credence quality characteristic of the era of big data. As elaborated below, with the development of big data, sellers can tailor their commercial proposal to a particular consumer in real time, thereby extracting more of the consumer surplus. (24) When offering these tailored terms, the sellers deviate from what used to be "benchmark" market terms. (25) The consumer is unaware and cannot reasonably become aware of the difference between the proposal made to him or her and the proposal made by the seller to others. (26) The constant deviations of individual transactions from the market terms is a new credence quality of the product that does not exist in completely offline transactions. (27)

   Part V is dedicated to policy recommendations. It first criticizes existing consumer protection laws as outdated and unable to address the problem of credence quality information asymmetry in the online sphere. (28) It then calls for an initiative that would make the anecdotal surfacing of information related to credence qualities more systematic, and that will improve the accessibility and assimilation of such information while avoiding information overload. (29) Practically, the recommendation is to establish a platform that would host consumer communities and allow for the systematic exchange of information on credence qualities. (30) The proposed model resembles that of wikipedia, allowing for voluntary contributions, though with the important distinction of supervision by a national regulator. (31) The guidelines for implementing this proposal are also delineated, and the section concludes by proposing how to supervise content, encourage voluntary contributions, and facilitate use. (32)

   The proposal of aggregating information for the benefit of consumers is consistent with the existing regulatory toolkit. (33) Some scholars even pointed to information platforms as a possible means of facilitating consumer access to information. (34) In particular, Ben-Shahar and Schneider advocated peer-rating or recommendation sites that were developed sua sponte in many markets, or "information aggregators," which they describe as intermediaries that "collect information and convert it into useful forms like price comparisons, ratings, labels, seals and certificates." (35) Helveston called for governmental support to "grassroot consumer protection movements," inter alia, by establishing a "centralized portal" that will encourage these movements. (36) van Loo also discussed the role of information intermediaries, focusing on the differences between private and public intermediaries. (37) While building upon such literature, this Article goes one step further, identifying the information that a regulated portal should include and elaborating guidelines for implementation. (38)

   To add such an additional layer to the existing literature, the Article links the distinction of the aforementioned three categories of information (search, experience, and credence qualities) to e-commerce market offerings. (39) This linkage is useful in demonstrating that despite the proliferation of information, an information gap remains with regard to credence qualities. (40) Additionally, this research contributes by offering a framework for a solution, suggesting that the information gap be filled by making use of the advantages of online connectivity to encourage a market-based solution supervised by the public regulator, and by proposing guidelines of implementation. (41)

2. The Economics of Information & E-commerce

   The economic literature often discusses perfect competition, which is claimed to be pareto efficient--that is, all resources are allocated so that all individuals or preference criteria are better off. (42) Perfect competition is claimed to materialize when individuals have perfect and complete information. (43) In reality, information is often missing. Information insufficiency is a condition in which all parties have insufficient information and no party enjoys an advantage. (44) Information asymmetry is a condition in which one party has more information and therefore an advantage. (45) Information asymmetries lead to adverse selection or moral hazard problems, and thereby, harm the market. (46) Information insufficiency and information asymmetry may result from the following boundaries to rationality. Risk and uncertainty is a situation in which a variable is unknown and cannot be known by either party, incomplete information is a situation in which the party to the transaction is not familiar with available information, and complexity is a situation in which an individual experiences difficulty in calculating all variables into an optimized decision. (47)

   Under regular circumstances, the seller, or service provider--who is engaged on a daily basis with supplying the product--is most familiar with the product or service provided and is better equipped to face the...