Signaling theory and information asymmetry in online commerce
Introduction
The Internet is a major sales channel and has resulted in fierce competition; it is therefore important to examine strategies that online retailers use to run their business successfully. However, there is little research that provides a way of evaluating a strategic website: most evaluation studies have centered on user-based surveys, while issues regarding strategic assessments from a seller point of view have been overlooked [4]. With the growing importance of the Internet as a shopping channel, examining online signals has important managerial implications [3].
The focus of our research was to evaluate retail websites from the sellers’ perspective. We analyzed actual websites and examined website features provided to signal quality to buyers. While honest sellers used truthful signals, deceptive sellers may have behaved opportunistically and manipulated website features to fraudulently signal quality.
Our objective was to examine specific signals that sellers, both legitimate and fraudulent, use to encourage online buying. Using signaling theory we developed a framework with three dimensions – purchase time continuum, ease of verification, and signaling cost. We examine how these dimensions influence the e-business to display signals on their website. In addition, we developed a classification that categorizes website signals by examining their specific characteristics. We then demonstrated how our framework and signal classification could be used by conducting a content analysis of existing pharmaceutical websites and testing our hypotheses. In our study, we focused on observable website signals that are provided by sellers pre-contractually (i.e. before actual purchase). By focusing on the sellers’ perspective, we compared signals that high- and low-quality sellers are likely to use.
Section snippets
The role of signals in information asymmetry
Signaling theory helps to explain the behavior of two parties when they have access to different information [5]. Strategic signaling refers to actions taken by a signaler to influence views and behaviors of receivers [18]. In e-commerce, signaling is displaying of certain website features that carry information from sellers to buyers.
The core of signaling theory consists of the analysis of various types of signals and the situations in which they are used [15]. Signals convey information about
Empirical investigation
To limit the scope of our investigation, we focused on pre-contractual signaling that mitigates problems of adverse selection.
Methodology
In order to test our hypotheses, we analyzed pharmaceutical websites for signals that high- and low-quality sellers in the pharmaceutical industry were likely to use. Pharmacies selected for the analysis were taken from North American directories of recommended and not recommended e-pharmacies.
Inter-coder reliability
Three independent researchers coded the sample of online pharmacies. The inter-coder reliability, computed as the percent of agreement obtained for all variables, ranged from 73% to 100%, showing a high level of reliability for all variables. Coding disagreements were adjudicated by discussion and consensus was reached after a joint examination of the feature in question.
Hypotheses testing
Descriptors (1) or (0) were assigned to indicate the presence or absence of each of the variables and to compute the total
Discussion
We developed a framework and a classification scheme for signaling in situations of information asymmetry in e-commerce. To demonstrate the applicability of our framework and classification scheme, we conducted an empirical study to compare signals provided by high- and low-quality sellers in the online pharmacy industry. We were able to shed light on the actual usage of signals in an online environment. Apparently there is a difference in choice of signals between low-and high-quality sellers.
Contributions
Our research was different from other studies because we focused on the role of IT (website and its characteristics), its usage, and its impact on a seller's decision to display a signal in situations of information asymmetry. To our knowledge, this is the first study that combines three distinct signaling dimensions into a framework to examine the actual usage of signals by online sellers of varying quality.
We extended our framework by introducing a classification of actual website signals,
Limitations
Our study showed that the proposed framework is useful in evaluating e-commerce signals. However, there are certain limitations to our study.
First, only pre-contractual signals alleviating adverse selection problems were analyzed.
Second, the focus of the study was on signals that are directly observable and cannot be subjectively interpreted.
Third, we examined only the presence of actual signals on websites and did not consider user perception of the signals.
In addition, we demonstrated the use
Conclusion
We examine the role of website signals as a way for online retailers to signal quality. Drawing upon signaling theory, proposed and validated a three-dimensional framework for website signals. Our study confirmed that there is a difference in signal usage between low-and high-quality online sellers: low-quality sellers are likely to avoid expensive, easy-to-verify signals and tend to use fewer signals than do high-quality sellers.
We showed that signaling theory can be successfully used in
Acknowledgements
This research is a part of the first author's dissertation titled “Signaling Theory and Information Asymmetry in Online Commerce: Seller and Buyer Perspectives.” The dissertation was funded in part by a PSC-CUNY grant #63611-00-41.
Tamilla Mavlanova is a Ph.D. candidate in Information Systems at Baruch College, City University of New York. She holds MS in Library and Information Science from Syracuse University. Her research interests include e-business strategy, issues of trust and deception in e-commerce, and cross-cultural research. Her work has been published in International Journal of Electronic Commerce, ACM Transactions on Human-Computer Interaction and presented at The International Conference on Information
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Tamilla Mavlanova is a Ph.D. candidate in Information Systems at Baruch College, City University of New York. She holds MS in Library and Information Science from Syracuse University. Her research interests include e-business strategy, issues of trust and deception in e-commerce, and cross-cultural research. Her work has been published in International Journal of Electronic Commerce, ACM Transactions on Human-Computer Interaction and presented at The International Conference on Information Systems (ICIS), Americas Conference on Information Systems (AMCIS), Hawaii International Conference on System Sciences (HICSS) and other conferences.
Raquel Benbunan-Fich is an associate professor of Information Systems at the Zicklin School of Business, Baruch College, City University of New York (CUNY). She received her Ph.D. in Management Information Systems from Rutgers University. Her research interests include User Behavior and Multitasking, Virtual Teams and Virtual Collaboration, IT Usage and Usability, Systems Development and Faculty Productivity. She has published articles on related topics in ACM Transactions on Human-Computer Interaction, European Journal of Information Systems, Information & Management, International Journal of Electronic Commerce, Journal of Strategic Information Systems and other journals.
Marios Koufaris is an associate professor in Computer Information Systems at the Zicklin School of Business of Baruch College, CUNY in New York City. He received a Ph.D. in Information Systems from the Stern School of Business of New York University, as well as a B.Sc. in Decision Sciences from the Wharton School of Business and a B.A. in Psychology from the College of Arts and Sciences, both at the University of Pennsylvania. His research interests include consumer behavior in online commerce, end-user behavior, and the social impact of IT. His work has been published in Information Systems Research, MIS Quarterly, Journal of Management Information Systems, International Journal of Electronic Commerce, Information & Management, DATA BASE for Information Systems, and Communications of the ACM.