A Study on Credit System of Cross-Border E-Commerce from the

Perspective of the Game Theory

Ying Li

, Fang Xing

Experimental teaching center, Guangxi University of Finance And Economics, Nanning city, Guangxi province, P.R.China

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 USD＄15 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

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

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

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A Study on Credit System of Cross-Border E-Commerce from the Perspective of the Game Theory

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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.

Assumption①: 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.

Assumption②: 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.

Assumption③: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.

Assumption④: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

, P

Vc, P

－C

No deal 0, 0

0, －C

In table 1, V

，V

represent the benefit that the

buyer obtains when the seller trade with credit and

with fraud, V

＞0，V

＜0. P

，P

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

and P

are

greater than zero and P

＞P

. 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

, and the

seller will gain P

. 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, and the buyer gains V

, and

＜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

, however he will be punished

by the supervisor, and the losses is －C, thus the net

benefits of the seller is P

－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

, and the buyer

gains V

. 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 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.

(2) If the seller chooses honest policy and

continues to do so in every transaction, then the

seller gains P

. The total benefit that the seller gains

is the sum of discount of the benefit from every

transaction. Set the discounting factor as δ（0＜δ＜

1）. When the buyers carry a game with the seller as

a group, set the number of potential buyers as n, B

，i= {1，2，3，…}, B

represent the 1th buyers,

then the discount value of total benefit that the seller

gains is:

＋δ

＋…＋δ

Equals:

（1－δ

）/（1－δ）

Only when the discount value of total benefit that

the seller gains is greater than that of total benefit

gains by fraud P

－C will the seller choose not to

deceptive policy. If the discount value of total

benefit equals to P

－C, there is still possibility that

the seller take deceptive policy. That means to

satisfy:

（1－δ

）/（1－δ）＞P

－C

When n tends to be infinite, P

/（1－δ）＞P

－

C, and conclude that δ＞1－P

/（P

－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:

δ＋P

/（P

－C）－1＞0

As 0＜δ＜1, to ensure that the above mentioned

equation is greater than zero, which means P

greater than P

－C and when then condition that P

（P

－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

/（P

－C ）－1 ＞0 ， which

means δ ＞ 1 － P

/（ P

－ C), the modal reaches

equilibrium. δ＜1，then 1－P

/（P

－C）＜1，P

＞ 0 ， P

－ 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

is greater than P

－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

＞0 into

≤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

, 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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