The first wave of internet retailers taught us many lessons about new ways of doing business online. They didn't really teach us much about new business models, however, because their central business model was well known. It has been described as mail order on steroids, which is a reasonable description of the fundamental operation of most business-to-consumer sites.

Of course, companies can interact with their customers via the internet in ways that are not feasible in physical environments. Realistically, though, there's nothing much different about ordering some pants from Lands' End on the web or over the phone while looking at the catalogue -except that looking at the catalogue is quicker and easier.

I think online businesses based on the person-to- person model have more to teach us in terms of future business. Auctions are the prime case in point: by allowing people to trade with people that they wouldn't generally be in touch with, they enable transactions that wouldn't otherwise take place. The efficiency of those transactions meant that small businesses soon moved in.

Take a look at eBay. It isn't simply a global car boot sale: it is an entire sub-economy of individuals and small businesses. Some of the businesses aren't so small, either. On any one day, the top 20 sellers account for 72,000 of the 4 million items listed and the top 38,000 sellers account for 2.7 million.

I've used eBay to buy a few things. In general, when I'm looking for something very specific, price is not the determining factor. Nor is location. It doesn't really matter whether the item I'm buying is being shipped from Edinburgh or Cardiff because the postage is the same. Compared with driving around looking for items, both in terms of the time taken and the expense, paying postage is a better alternative.

In fact, if I do a search on eBay and find the item that I'm looking for, then my first action is to check not the price, not the location and generally not the date of the auction but the seller's reputation. With a single click I can see who has been buying from that seller and I can also see the buyers' feedback about the seller.

The issue of reputation soon becomes sophisticated. If you're buying items of a certain kind, then you will soon learn who are the other reputable dealers in that field. Consequently, when you look at a seller's reputation, positive comments from people you know to be reputable count for far more than positive comments from strangers. In other words, in a relatively short time, a sophisticated reputation hierarchy develops and it is in everyone's interest to maintain it in order to minimise overall transaction costs. All of this takes place without external reputation "regulation": government ratings agencies and the like.

The system isn't perfect, of course. Until the technology for managing digital credentials and digital reputation is widespread (public key infrastructure, one of this year's hot technologies) then reputations are managed only on the basis of email addresses. This means that the upper limit on transactions must remain limited since it is too easy to obtain and forge email addresses, leading to "schill" auctions where the sellers bid for their own items (to ramp the price) from multiple email addresses. In time, however, the arrival of more secure digital identity mechanisms will help lift the limit. These technologies provide a means to manage persistent identity and credentials (and therefore reputation) in a consistent way.

Here is a lesson for the future of online commerce that is worth studying. In a global, low transaction cost marketplace, reputation could become the pivot on which transactions depend. Note also that knowledge of reputation is quite distinct from absolute knowledge of the seller's identity.

If I find a seller labelled as John Doe, I really have no interest in discovering their underlying identity: that takes time and effort. If there are positive comments about them from people whose opinion I value then I will do business with John Doe. If there are negative comments, then I won't. And it won't matter to me whether John Doe has a badge from the local council, the government or some other body's approval. My decision will be based not on what anyone thinks, but on what everyone thinks.