If neither party does anything, the buyer is out 2x and
the seller is out 1x. This encourages the buyer to pay
up and the seller to deliver.
If the seller doesn't mail the goods and cannot be contacted, surely the buyer will have a choice to either (a) leave the payment in escrow, getting nothing back (but giving nothing to the seller) or (b) approve the transaction, getting 1X back (but giving 2X to the fraudulent seller).
Wouldn't buyers choose (b) because getting back 1X is better than nothing?
And if you're going to release payments even when you're the victim of fraud, you might as well not bother with the escrow?
This is the situation that no one who releases a system based on this method(I can think of a few over the past year) thinks of. They assume the buyer will always act on social instead of financial best interest in the event of a scam.
In short: The protocol is not even remotely thought through. It is incomplete and cannot work the way it is described.
I wonder if it is theoretically impossible to create a protocol that punishes cheating when the cheating occurs outside the system (when the physical goods change hands).
And even if it isn't you would also somehow have to consider the fact that things get lost or damaged in the mail and assign blame to one party on the protocol level.
Wouldn't buyers choose (b) because getting back 1X is better than nothing?
And if you're going to release payments even when you're the victim of fraud, you might as well not bother with the escrow?