The Effectiveness of the Escrow Model: An Experimental Framework for Dynamic Online Environments

This article investigates the mechanism of an online escrow service (OES) in online consumer-to-consumer (C2C) auctions. We develop a discrete-event driven simulation model for the dynamics of an OES adoption in electronic markets that involves four types of agents: the strategic trader, the moral trader, the OES provider, and the law-enforcement agent. By applying the Monte Carlo method in computer-based simulations, we demonstrate that the OES business model can effectively block fraud attempts and promote security in online C2C auction markets. However, our findings reveal that the prevailing OES fee rates are not necessarily set at the profit maximization level. Meanwhile, the simulation results show that the legal mechanisms in electronic markets directly impact the profit of escrow services.