Trusted intermediating agents in electronic trade networks

Electronic commerce and trading of information goods significantly impact the role of intermediaries: consumers can bypass intermediating agents by forming direct links to producers. One reason that traditional intermediaries can still make a profit, is that they have more knowledge of the market, so trading via an intermediary saves on search costs [1], allowing the intermediary to charge a markup and make a profit. Another reason is trust and loyalty between consumers and intermediaries (cf. [6]). In this paper we investigate whether trust-based intermediating agents will also be able to make a profit in electronic markets, where other advantages of intermediaries (i.e., advantages of location or scale) disappear, but where trust and reputation mechanisms are becoming popular for helping consumers make purchasing decisions in the face of information overload on the world wide web [2]. We model an electronic market where agents trade an information good over a network. Buyer-agents use a decentralized reputation-based trust mechanism [4] to determine which connections to maintain to sellers of the good (producers and intermediaries), communicating with each other to establish trustworthiness of sellers to which they are not currently connected. The existence of such a reputation mechanism allows intermediating agents to accumulate a base of loyal consumer-agents who are willing to pay the intermediaries' markup in exchange for the intermediating agents' protection against the dynamics of the market place. Using computer simulations, we show that if market dynamics are sufficiently complex, trusted intermediaries are able to increase their market share and make a profit.