A Study on Credit System of Cross-Border E-Commerce from the
Perspective of the Game Theory
Ying Li
1
, Fang Xing
2
1
Experimental teaching center, Guangxi University of Finance And Economics, Nanning city, Guangxi province, P.R.China
2
Information Department, Guangxi Bureau Zhuang Autonomous Region by Information of Remote Sensing Surveying and
Mapping Institute, Nanning city, Guangxi province, P.R.China
Keywords: Cross-border E-commerce, infinitely repeated game, credit system.
Abstract: To improve the
uncertainty of transaction in cross-border E-commerce, this paper analyses the
practices of all the parties concerned cross-border E-commerce from the perspective of the game theory,
and analyses the sources of fraud by seller by creating infinitely repeated game modal for cross-border E-
commerce, proposing that some measures should be taken to solve the problem of credit in cross-border E-
commerce, such as cultivating credit consciousness, establishing long-term cooperative business relation,
reinforcing supervision from the third party and increasing the cost of fraud.
1 INTRODUCTION
With the rapid development of information
technology, E-commerce has swept every corner of
the world, all business has been facing new
transformation, and E-commerce has become an
important way of consumption in our daily life.
After the financial crisis broke out in 2008, global
market demand has been shrinking dramatically,
which have inflicted a severe impact on the exports
of China. Meanwhile, cross-border trade have also
undergone irreversible changes, and traditional big
deal international trade has now increasingly been
taken place by trade order with the characteristics of
small batch, more deals and fast delivery. In order to
adapt themselves to the new environment, exporting
enterprises make an attempt to choose cross-border
E-commerce with online trade as its core and fast
and convenient service as its advantage, finding new
markets and cutting cost distribute risks. Chinese
government also brought forward favorable policy
for E-commerce for several times. In July 2013,
Chinese government issued "national six-points
package" to supporting cross-border E-commerce, in
2014, a unified export customs clearance system for
cross-border E-business which can be applied to the
whole nation have been developed and is now
running online in Dongguan. A series of policies
have accelerated the development of cross-border E-
commerce of China. With those favorable
conditions, huge amounts of new businesses have
emerged in cross-border E-commerce, and trade
scale increased rapidly. According to the statistics
from China E-commerce study center, the volume of
E-commerce exceeded USD 200 billion, with
export in retail sales of cross-border E-commerce
reached USD15 billion. Till 2013, more than 5000
companies engaged in cross-border E-commerce and
over 200,000 companies conduct cross-border E-
commerce by all kinds of platforms, and a large
number of small and medium size businesses joint
this industry with 90% of newly registered user are
small and medium size enterprises and self-
employed business. In 2013, Report on cross-border
E-commerce by PayPal have shown that online
shopping demand for goods made in China of the
five biggest target markets, namely, the U.S, the
U.K, Germany, Australia and Brazil, will reach
RMB144.4 billion in 2018.
As cross-border E-commerce has dual nature:
international trade and E-commerce, likewise, the
blocks that resist the development of these two kinds
of trades are also the blocks for cross-border E-
commerce but with more powerful influences.
Researches by Wang Lin and Yang Jian shows that
such factors as marketing capability, logistics,
payments, tariff policy and regulation of cross-
border E-commerce have great impacts on the
development of cross-border E-commerce, and
regulation on cross-border Ecommerce which
268
268
Xing F. and Li Y.
A Study on Credit System of Cross-Border E-Commerce from the Perspective of the Game Theory.
DOI: 10.5220/0006448802680273
In ISME 2016 - Information Science and Management Engineering IV (ISME 2016), pages 268-273
ISBN: 978-989-758-208-0
Copyright
c
2016 by SCITEPRESS Science and Technology Publications, Lda. All rights reserved
contains credit regulation has the greatest
influence.(Wang & Yang, 2014) As a form of E-
commerce, cross-border E-commerce has received
limited recognition by consumer, and the complexity
of E-commerce makes it difficult for consumer to
trust cross-border E-commerce.(
Meuter & Meute,
2000
) However, trust is the prerequisite for consumer
to trade with the sellers on line and has become the
major blocks that influence steady development of
cross-border E-commerce.(
Jarvenpaa, Tractinsky &
Vitale, 2001
) If problems arose by trust can't be solve
as soon as possible, they will definitely become a
bottleneck for the development of cross-border E-
commerce. Therefore, it is necessary to analyze the
source of trust problem and figure out the solutions
to the problem.
When conducting cross-border E-commerce,
in order to attain their goal and benefit, all the
parties concerned take into consideration the policy
of other parties when they are making their own
policy and then take the policy which is most
favorable to them.(
Yang, 2013) Therefore, cross-
border E-commerce falls into the category of typical
non-cooperative game issue. From the perspective of
ration, every policy seller takes is in the hope of
closing a deal with buyers and being the first choice
for buyers. Likewise, buyers trade online repeatedly
, and they make choice before every trade close,
thus, the game between buyer and seller can be
considered as a process of repeated game. Take that
as the basis, this paper tries to study the credit issue
from the perspective of game theory and creates
infinite repeated game modal for cross-border E-
commerce, proposing suggestions on the
establishment and improvement in credit system of
cross-border E-commerce.
2 ANALYZING THE CREDIT OF
CROSS-BORDER E-
COMMERCE FROM THE
PERSPECTIVE OF THE GAME
THEORY
2.1 The Definition of Credit and Fraud
All the parties' behavior is rational when they
conduct transaction through cross-border E-
commerce. Should a party, motivated by illegally
possession of other party's property in ways of
fabricating facts, concealing the true and taking
advantages of other party's trust, fails to perform or
under-performs his obligation even though the
payment or delivery have been made by other party
concerned, then his behavior is defined as fraud.
Conversely, if a party fulfills all obligation imposed
on him under the agreement, his behavior is defined
as good faith. For example, the seller provides the
buyer with products or service which is conforming
to the description and excellent in quality with
reasonable price, the seller's behavior is called as
credit, in reverse, if the seller provides products and
service which are not in conforming to his
description or have quality defect, such behavior can
be called as fraud.
2.2 Analysing the Behaviour of Game
of Transaction Parties in Cross-
Border E-commerce
Every cross-border E-commerce transaction can be
considered as a game. Sellers may choose between
honesty and fraud in the process of transaction, and
consumers may choose between deal or no deal.
According to existing regulations on the credit
evaluating of cross-border E-commerce, both buyer
and seller make reviews and rating on each other's
products, service, and behaviour after a transaction
closed, and those reviews can be read and referred
by following transaction parties. Therefore,
transaction parties have to take into consideration
how other parties concerned review the transaction
when making decisions, then take specific policy.
Subsequent buyers ' may not be willing to trade with
the sellers who have credit issue which can be
referred from the reviews by the proceeding buyers,
plus, the difficulties and risks in settling disputes of
cross-border E-commerce also prevent them from
trading. The consequence is that buys' interest in
transaction diminishes greatly, and then they turn to
other sellers, which is not a result that all the buyers
expect.
Buyers can learn about sellers' credit information by
referring to seller's information, transaction records
and rating, and sellers are also aware that buyers
may make a choice between deal or no deal when
they learn their condition. Buyers do not trade with
any seller in question by cross-border E-commerce.
Knowing that buyers do not trade with the buyers
who conceal information, the sellers provide as
much information as possible on proceeding
transaction records and credit ratings. As it is more
risky than other ways of shopping online to trade by
cross-border commerce, credit seems more
important than price to the buyers. Therefore, if a
buyer finds that the buyer provide products and
service with good quality, which constitutes pleasant
A Study on Credit System of Cross-Border E-Commerce from the Perspective of the Game Theory
269
A Study on Credit System of Cross-Border E-Commerce from the Perspective of the Game Theory
269
trade experience for him, then this seller will be the
first choice for the buyer who wants to buy the
goods again later on. This is the aim that all the
buyers work for. Seller may not receive good
reviews even though he choose to be honest, but he
will be definitely reviewed poorly if he conceals
information for fraud transaction, which will have
impact on the decisions by the following buyers,
consequently, no buyers will trade with the seller.
3 ANALYZING THE GAME
BETWEEN TRANSACTION
PARTIES OF CROSS-BORDER
E-COMMERCE CREDIT
SYSTEM
3.1 Basic Assumption on Infinitely
Repeated Game Modal
Cross-border E-commerce is a complicated process,
basing on the previous description, we make the
following assumption for better analysing the
gaming behaviour of every party concerned.
Assumption: In cross-border E-commerce, the
seller is able to provide products repeatedly, and
possess a number of potential buyers, therefore, we
can assume that there are only two parties concerned
in cross-border E-commerce, namely the buyer and
the seller. The seller can only make a choice
between to trade or not to trade, and the buyer can
only make decision between selling the quality
products at reasonable price with sincerity or selling
inferior ones by fraud.
Assumption: Every party concerned is rational
economic man who pursues maximum benefit.
Information on transactions between the parties is
asymmetrical, which means that both buyer and
seller can't access to complete information of each
other, but trading information is accessible for buyer
by referring to the trade records and take it into
consideration when making decision: the buyer
choose to trade with the buyer who always trade
with good faith, in contrary, the buyer may drop the
deal if there is any record of fraud of the seller.
Assumption:In the process of transaction, what
policy will be taken by the parties concerned is not
known to each other, and all the parties concerned
make decision at the same time, and the static game
is conducted between the two parties.
Assumption:The transaction is under effective
supervision. For example, the government or the E-
commerce platform stipulates relevant law and
regulation to punish deceiver, and the seller will be
punished for fraud. The punishment can be direct
economic losses or such indirect losses as the loss of
reputation.
3.2 Create Infinitely Repeated Game
Modal and Its Resolution
Based on the above mentioned assumption, a payoff
matrix of infinitely repeated game modal is
established as shown in table 1.
Table 1 payoff matrix
Seller
buyer
credit fraud
Deal V
h
, P
h
Vc, P
C
C
No deal 0, 0
0, C
In table 1, V
h
V
c
represent the benefit that the
buyer obtains when the seller trade with credit and
with fraud, V
h
0V
c
0. P
h
P
c
represent the
benefit that the seller gets when he choose to trade
with honesty and fraud in the condition that the
buyer chooses to trade with him. Both P
h
and P
C
are
greater than zero and P
c
P
h
. C represents seller's
losses resulting from the penalty by the supervisor
because of the fraud during the transaction. If the
seller chooses to be honest, and the buyer chooses to
trade with him, then the buyer will gain V
h
, and the
seller will gain P
h
. If the seller chooses to be honest,
while the buyer chooses not to trade with the seller,
then both parties gain nothing. If the buyer chooses
to cheat during the transaction, while the seller
chooses to trade with him, the benefit that the seller
gains will be P
C
C, and the buyer gains V
c
, and
V
c
0. If the buyer chooses fraud the buyer chooses
not to trade with him , then the benefit that the seller
gains from fraud is P
C
, however he will be punished
by the supervisor, and the losses is C, thus the net
benefits of the seller is P
C
C.
According to the assumptions, all the parties
concerned pursuit maximum benefits, therefore, if
the seller has traded with fraud in the past at least
once, and the record of the transaction is shared, the
buyer will choose not to trade with him upon
learning the information. Meanwhile, the buyer
believes that the seller will continue to cheat, so the
buyer will not choose to trade with the seller later
on. As long as the seller cheats once, a rational
buyer will not trade with him anymore. If the seller
always chooses to be honest and operates with
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sincerity, then a rational buyer will choose to trade
with him and is likely to choose trade with the seller
again. The equilibrium will be that (credit, trade),
the benefit that the seller gains is P
h
, and the buyer
gains V
h
. In the situation that the buyer chooses not
to trade, while the seller chooses to cheat, the benefit
the seller gains is C. Therefore, rational seller will
choose honest policy to guarantee his maximum
benefit.
In the condition that the buyer chooses to trade,
the buyer makes the following decision.
(1) The seller choose to cheat, the benefit the
seller gains is P
C
C from this transaction. As a
rational buyer will not trade with the seller, then the
seller will not gain any benefit anymore, then the
total benefit that the seller gains is P
C
C.
(2) If the seller chooses honest policy and
continues to do so in every transaction, then the
seller gains P
h
. The total benefit that the seller gains
is the sum of discount of the benefit from every
transaction. Set the discounting factor as δ0δ
1. When the buyers carry a game with the seller as
a group, set the number of potential buyers as n, B
i
i= {123…}, B
i
represent the 1th buyers,
then the discount value of total benefit that the seller
gains is:
P
h
δ
1
P
h
δ
2
P
h
δ
3
P
h
δ
n
P
h
Equals:
P
h
1δ
n
/1δ
Only when the discount value of total benefit that
the seller gains is greater than that of total benefit
gains by fraud P
C
C will the seller choose not to
deceptive policy. If the discount value of total
benefit equals to P
C
C, there is still possibility that
the seller take deceptive policy. That means to
satisfy:
P
h
1δ
n
/1δ)>P
C
C
When n tends to be infinite, P
h
/1δ)>P
C
C, and conclude that δ1P
h
/P
C
C.
Therefore in order to make equilibrium of this
modal, which means that to make the seller choose
honest, the following condition should be satisfied:
δP
h
/P
C
C)-10
As 0δ1, to ensure that the above mentioned
equation is greater than zero, which means P
h
is
greater than P
C
C and when then condition that P
h
/
P
C
C)>1 is satisfied, the seller will not choose
fraud.
Therefore, as long as the seller gains more benefit
by trading with honesty than by fraud, the decision
making combination (credit, buy) will reach Nash
equilibrium.
3.3 The Conclusion of The Analysis on
Infinite Repeated Game Modal
By the proceeding analysis, the following conclusion
can be drew:
(1) When δ P
h
/P
C
C )-1 0 which
means δ 1 P
h
/ P
C
C), the modal reaches
equilibrium. δ1then 1P
h
/P
C
C)<1P
h
0 P
C
C 0. Which means that the benefit
seller gains will not be zero no matter which policy,
honesty or fraud, the buyer takes in a transaction.
(2)When P
h
is greater than P
C
C, which means
that in cross-border E-commerce, if the benefit that
the seller gains when taking honest policy is less
than that when taking dishonest policy, the rational
seller will choose fraud. The greater the punishment
on fraud, the bigger the value of C will be, and the
less confidence the seller will lose. In a conclusion,
in cross-border E-commerce, the reason why the
seller chooses fraud operation is that fraud in
transaction is still lucrative in a number of
transactions. Only by the supervision from the
government or the third party and the increase in
cost of fraud operation, which makes the benefit
gains after many times of fraud less than that gains
from honest operation, will the seller keep honest
policy in transaction. In addition, if the buyer
discovers seller's dishonest operation, the seller will
cease trading with the buyer and not choose the
seller later on. Only by keeping credit records and
operating with integrity will a buyer be chosen by
the buyers as a trade partner in the future. which is
telling us that problems of credit can be solved
when the seller and the buyer establish concept of
long-term cooperation and the seller keep operating
honestly.-
4 SUGGESTIONS ON
ESTABLISHING CREDIT
SYSTEM OF CROSS-BORDER
E-COMMERCE
(1) Reinforce education in credit and establish
concept of long-term cooperation between buyers
and sellers.
From the analysis on infinite repeated game
modal, a conclusion can be drew that honesty is the
basis for cross-border E-commerce transaction,
seller participating in cross-border E-commerce
should establish concepts of honest operation and
long-term cooperation, which contributes to long-
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term benefit and steady development of cross-border
E-commerce transaction. Because of the uncertainty
of the identity of the parties concerned in cross-
border E-commerce transaction, the complicity of
trade procedure and the difficulty in protecting
consumers' rights, leading to weak credit
consciousness of all the parties concerned in cross-
border Ecommerce transaction. What's more, a large
number of enterprises in China, especially small or
medium size enterprises and self-employed
operators, usually pursuit short-term benefit instead
of development in long run. Additionally, there
exists many problems in credit rating system of
cross-border E-commerce transaction, which makes
the seller take chances to cheat during transaction.
However, with the transformation of present credit
rating system of cross-border E-commerce
transaction, the buyers' past records of dishonest
operation will get them unable to continue their
business online. Likewise, for the buyers who cheat
online, they have to make over in order to enter the
market.
To ensure the rapid development of cross-border
E-commerce, the government should promote
integrity education and strengthen people's credit
awareness. Meanwhile, a series policy should be
enacted to support enterprises that are in the market
of cross-border E-commerce, avoiding those
enterprises from sacrificing long-term development
for immediate interests just because they lack the
ability for further development. For those buyers
who always with integrity, the government should
give preference. Thus, more and more buyers will
highlight long-term object, which requires them to
emphasizing establishing credit in cross-border E-
commerce market.
(2) Improve credit system of both buyers and
sellers and enhance the credibility of credit
information.
In cross-border E-commerce transaction, the
buyers make decision by referring to seller's past
trade records, therefore, an improved credit rating
system of both parties is one of the reason why the
parties concerned insist on honest trade. However,
in order to receive favourable reviews, some seller
employ " Online Water Army” to post false
comments on the Internet, which have a negative
influence on the effect of credit in cross-border E-
commerce transaction. The effective ways to solve
this problem include: to establish an opened, shared,
perfect credit rating system, to require every users to
acquire real-name authentication, to link the virtual
trading parties in E-commerce transaction to actual
trading parties in reality, minimizing the impacts of
anonymity during transaction.(Xu, 2010)
(3) Strengthen supervision from other parties and
establish severe punitive system and proper
incentive system.
The government should establish an improved
cross-border law system and normal economic
system, enforce supervision, and improve the
probability of disclosing fraud. Meanwhile, a severe
punitive system should be established, and the cost
of fraud thus will be increased, turning P
C
0 into
P
C
0, preventing sellers from cheating but pursuing
maximum benefit. Besides, the government should
establish a proper incentive system, the enterprises
who operate with good faith will be awarded,
increasing the value of P
h
, so as to encourage them
to keep trading with sincerity.
Cross-border E-commerce platform is the
precondition for E-commerce transaction, it not only
provide the trading parties with service, but also
record and identify transactions between the parties
concerned and then pass the information to relative
credit management platform. Therefore, it is
necessary for cross-border E-commerce platform to
improve its skills, deterring the party who intends to
cheat by powerful supervision. The more powerful
the supervision is, the more likely parties concerned
take the decision of (credit, trade). It is advisable to
ensure that the price of goods is proportional to
punishment, which makes the cost of punishment is
expensive enough to exceed the benefit that gains by
dishonest operation, thus increasing the possibility
for parties concerned to take honest policy.(Ding &
Song, 2007)
(4) Accelerate the establishment of a transparent
and unimpeded information circulation channel.
True and effective information is of great
importance for the good faith of parties in cross-
border E-commerce. Cross-border E-commerce
involves transaction parties from home and abroad,
and there is enormous amount of information on the
Internet, and there is great information asymmetry in
this market, which increase the uncertainty of
transaction. From this perspective, to establish a
transparent and unimpeded information circulation
channel will be the key to restrain the parties
concerned from cheating. By passing information
and improving the transparency of deceivers'
information, realizing a virtuous circle self-purifying
and credit system.
Therefore, Chinese cross-border E-commerce
platform should address the problem of reviews
management and reinforce the supervision and
regulation on the phenomenon of blocking,
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eliminating poor reviews by buyers. It is advisable
that buyers' reviews are managed by an independent
department instead of managing by on sellers' own.
It is suggested to adopt Amazon's credit rating
system which allow the following sellers to vote for
the previous buyer, the review most voted will be
post on top of all the reviews, while those reviews
that do not receive any votes can be eliminated. But
the prerequisite for this system is to establish a true
credit rating system, or it will be taken advantage by
deceivers.
5 CONCLUSIONS
By analysing the gaming behaviour of parties
concerned in cross-border E-commerce through
establishing infinite repeated game modal, this
research proposes measures to the credit problems of
cross-border E-commerce: reinforce education in
credit and establish concept of long-term
cooperation between buyers and sellers, improve
credit system of both buyers and sellers and enhance
the credibility of credit information, strengthen
supervision from other parties and establish severe
punitive system and proper incentive system,
accelerate the establishment of a transparent and
unimpeded information circulation channel. As
single game modal was adapted to analysis the
resource of credit problem in cross-border E-
business in this research, the limitation of this modal
is that such important factors as morality and critics
have not been analysed, which makes it
uncompleted in the suggestions in establishment of
credit system of cross-border E-business. In the
following research, the author plans to make a
further analysis on the establishment of credit
system in cross-border E-commerce from a broader
perspective of pure strategy game modal, mixed
strategy game modal, fuzzy game modal, and extract
the basic factors contributing to credit system in
cross-border E-commerce.
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