Post-Sale Service and the Limits of Reputation

Industrial and Corporate Change, 2013

45 Pages Posted: 15 May 2009 Last revised: 4 Mar 2013

Scott E. Masten

University of Michigan, Stephen M. Ross School of Business

Renáta Kosová

Cornell University - School of Hotel Administration

Date Written: May 10, 2009

Abstract

In the standard durable-goods-quality model (e.g., Klein and Leffler, 1981; Shapiro, 1982, 1983), the prospect of repeat sales is often adequate to support the provision of high-quality durable goods even when quality is not observable at the time of purchase. We show that when durable goods require costly post-sale service, a reputational equilibrium may not exist at any price, even with a flow of profitable new sales indefinitely into the future. More generally, we characterize the size of the premium needed to make promises to provide post-sale service self enforcing. We then apply the model to United Shoe Machinery, IBM, and Xerox, using historical records to estimate the self-enforcing post-sale service premia that would have been necessary for each of these companies.

Keywords: reputation, durable goods, post-sale service

JEL Classification: L14, L15, L63, L64

Suggested Citation

Masten, Scott E. and Kosová, Renáta, Post-Sale Service and the Limits of Reputation (May 10, 2009). Industrial and Corporate Change, 2013 . Available at SSRN: https://ssrn.com/abstract=1404907 or http://dx.doi.org/10.2139/ssrn.1404907

Scott E. Masten (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-1389 (Phone)
815-572-8207 (Fax)

Renata Kosova

Cornell University - School of Hotel Administration ( email )

School of Hotel Admin.
545B Statler Hall
Ithaca, NY 14853
United States
606-254-3383 (Phone)
607-255-1355 (Fax)

HOME PAGE: http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=204

Paper statistics

Downloads
143
Rank
167,902
Abstract Views
1,044