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Agent Based Modeling of Electronic Markets To Analyze the Sustainability of Mutual Cooperation

According to game theory, dominant strategy of Prisoner’s Dilemma game is defecting. Since online trading between two strangers falls in the realm of a Prisoner’s Dilemma, failure should be the only logical conclusion of such electronic commerce situation. Traders are less likely to cooperate since they are not required to deal with the same buyer again given the enormous population of online traders. Thus one could argue that markets like eBay should never exist. Then what is the reason behind resounding success of such electronic markets? The answer lies in the reputation system that they established. Google page rankings and reader reviews on various sites like Amazon.com and Epinions.com are some other examples of the reputation system pointing towards the enormous influence that they wield in our everyday life. This research thus attempts to analyze importance of reputation system in an online trading using Agent Based Simulation. The effect of reputation system on the sustainability of mutual cooperation between online traders is analyzed by taking into account key factors like level of gullibility of online traders and the weight of influence given to their past behavior. Results indicate that reputation system is certainly capable of sustaining cooperation among online traders. However, weightage given to the past behavior of agents should be decided only after taking into account the level of gullibility of agents. Use of agent based modeling for studying dynamics of online trading is a relatively new concept. Sustaining cooperation among online traders is often perceived to be difficult task. The reputation system proposed in this research is expected to make contribution towards this goal.