The Role of Quality in On-Line Service Markets∗

We use data from an on-line market for programming services to assess buyers’ welfare gains associated with the globalization of this service market enabled by the Internet. Our study exploits the design of this market where projects are allocated through multi-attribute auctions, a mechanism that takes into account a seller’s non-price characteristics as well as his bid. We focus on the increased variety and competitive effects associated with the presence of low cost sellers as the main welfare-improving consequences of globalization. The paper proposes an empirical methodology to recover primitives of the model in the presence of unobserved seller heterogeneity. The methodology is designed to accommodate two important features of such markets: buyer-specific choice sets and the high turnover of sellers. We find that the Internet enables buyers to substantially improve on their outside (local) option, with the larger part of the gains arising from access to the international markets.