The economics and psychology of consumer trust in intermediaries in electronic markets: the EM-Trust Framework

Abstract

The rise of electronic markets (EM) and e-commerce came with the promise of disintermediation. Yet, from aggregators to authenticators, the online landscape today is scattered with intermediaries such as EBay and Verisign, aiming to streamline e-commerce transactions and building consumer trust in EM. The central theme of this paper is to understand the contextual factors that lead to consumers’ need to trust intermediaries. In developing our arguments, the paper synthesizes perspectives from information economics, transaction cost economics, and literature on institution-based trust to develop the EM-Trust Framework. Drawing from information economics, the paper contends that EM embody certain inefficiencies, which in turn contribute towards heightening consumer uncertainty, especially under conditions of high information specificity. Heightened consumer uncertainty subsequently reduces consumer trust in EM. It is only in the face of uncertainty and a loss of trust in EM that consumers transfer their need to trust in intermediaries. However, the transference of trust is complete only if agency costs from intermediation lie within consumer thresholds. A mini-case of online mortgage marketplaces is used to illustrate the EM-Trust Framework, thus creating threads for more insightful investigations in the future.

Keywords:

• Electronic Markets
• inefficiencies
• uncertainty
• information specificity
• institution-based trust
• intermediaries
• transaction cost
• agency cost
• e-commerce

Notes

1 While there are obvious windows (e.g. economies of scale and scope, price discovery, buyer seller matchmaking) for explaining the rise of intermediaries in EM, it has been unequivocally ascribed that intermediaries are essentially providers of trust (e.g. Bakos, 2001; Giaglis et al., 2002; Zwass, 2003). We therefore use the lens of trust to explain the rise of intermediaries in EM.

2 At this point, it is important to note that the arguments posed by this paper generally concern Business-to-Consumer (B2C) and Consumer-to-Consumer (C2C) transactions in EM. Because Business-to-Business (B2B) linkages are often pre-verified and better controlled (e.g. use of dedicated connections, value-added-networks, proprietary interchange formats such as EDIFACT), one could argue that B2B markets are less prone to inefficiencies plaguing B2C and C2C EM.

3 While we recognize that trust grows as consumers interact more and more with an environment, it is not always the case with EM. With millions of nodes (sites) from around the globe being added daily, newer and faster connections being introduced, ingenious ploys abound. Buffer overflows, phishing, spoofing, repudiation, adware, and spyware are just a small sample of the ingenious ploys that consumers often succumb to in EM. The unprecedented dynamism of EM makes consumers evermore wary and uncertain.

4 Positive network externalities refer to the fact there is a positive marginal effect of an additional user of a network upon existing users of the network (Asvanund et al., 2004).

5 While we do agree that these inefficiencies are largely objective, our focus in this paper is more on what consumers feel about such inefficiencies (since we are theorizing about their need to trust intermediaries). Hence our framework refers to perceptions of such inefficiencies.

6 We contend that, in conditions where consumers lack trust in both EM and the intermediaries therein, consumers may simply refrain from transacting online.

Additional information

Notes on contributors

Pratim Datta

About the authors

Pratim Datta is an assistant professor of Information Systems in the Department of Management and Information Systems at Kent State University. Pratim has a Ph.D., MBA, and MS in information systems and decision sciences and has over six years of IT operations and deployment experience. Pratim actively pursues research in the security, design, and reengineering of information systems as well the economics and psychology of user behavior in a variety of technology settings. His research has been published and presented in a variety of journals and conferences, notably the Journal of the Association of Information Systems (JAIS), IEEE Transactions, Communications of the Association of Information Systems (CAIS), Communications of the ACM (CACM), International Conference on Information Systems (ICIS), and the European Conference on Information Systems (ECIS).

Sutirtha Chatterjee

Sutirtha Chatterjee is a doctoral candidate in the Department of Information Systems at Washington State University. Prior to pursuing his Ph.D., Sutirtha held a bachelor's degree in Computer Science and Engineering from Jadavpur University, India and worked in Wipro Technologies in India for five years. Sutirtha's research interests are in the areas of Information Systems Ethics, Electronic Markets, and Technology-Mediated Collaboration. He conducts research along different paradigms such as theory building, quantitative research, qualitative research, and design science research. His research has appeared in various conferences such as the European Conference on Information Systems, the Hawaii International Conference on System Sciences, and the America's Conference on Information Systems.