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Published April 1983 | public
Journal Article

Reputation and product quality

Abstract

This article considers the role that reputation plays in assuring product quality in markets where consumers can only imperfectly judge product quality even after consumption. Three conclusions are derived. First, high quality firms have more customers because they have fewer dissatisfied customers who leave and word-of-mouth advertising results in more arrivals. Second, higher fixed costs can result in a higher equilibrium level of quality. Third, the particular form that word-of-mouth advertising takes can have significant effects on the market outcome. Recommendations consisting of a report of whether the consumer intends to patronize the same firm again generate an externality that is absent when actual estimates of quality are communicated.

Additional Information

© 1983 RAND Corporation. This work was supported by National Science Foundation Grant SES80-06654 at the Institute for Mathematical Studies in the Social Sciences, Stanford University. I would like to thank Robert Bates, Kathleen Hagerty, Alvin Klevorick, Roger Noll, Carl Shapiro, Alan Schwartz, Louis Wilde, and two anonymous referees for helpful comments and discussions. Formerly SSWP 330.

Additional details

Created:
August 19, 2023
Modified:
October 20, 2023