Journal of Political Economy Vol. 113 No. 5 2005
Is Bigger Better? Customer Base Expansion through Word‐of‐Mouth Reputation
Abstract
A model of gradual reputation formation through a process of continuous investment in product quality is developed. We assume that the ability to produce high‐quality products requires continuous investment and that as a consequence of informational frictions, such as search costs, information about firms’ past performance diffuses only gradually in the market. This leads to a dual process of growth of a firm’s customer base and an increase in the firm’s investment in quality. The model predicts, therefore, that the longer its tenure as a high‐quality producer, the more a firm invests in quality. We relate this finding to empirical work on online commerce as well as on traditional industries.
- DOI
- 10.1086/444552
- Volume
- 113
- Issue
- 5
- Pages
- 1146-1162
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref