It is my view that reputation is the foundation upon which all economic activity is based. When two parties are in negotiations, they are taking into account each other's reputation and using it to their advantage. If their reputation is good, they are using it to bolster stability and confidence in completion of the deal. If their reputation is bad, it can justify a lower price or another mitigating factor.
I have personal experience in cultivating a reputation and then maintaining it. I am the sole proprietor of an eBay business, and when I first started my vendor account with them, I had no customer feedback whatsoever and people were hesitant to buy my items. This only reinforces my earlier point that people use reputation as the basis for their economic activity. When I didn't have a reputation on eBay yet (no customer feedback), my trading volume was very low, similar to those vendors that had bad customer feedback. After providing good service for a few months, I was able to accumulate enough good customer feedback so as to assure future buyers that I was a legitimate vendor and was not out to cheat anyone.
In a perfectly competitive market, both parties have complete information. However, in the real world, no one has complete information and a lot of the information is inferred from the reputations of their respective parties.
