Reputational Economies of Scale

30 Pages Posted: 13 Apr 2018 Last revised: 8 Oct 2020

See all articles by Daniel M. Klerman

Daniel M. Klerman

University of Southern California Gould School of Law

Miguel de Figueiredo

University of Connecticut - School of Law

Date Written: October 8, 2020

Abstract

For many years, most scholars have assumed that the strength of reputational incentives is positively correlated with firm size. Firms that sell more products or services were thought more likely to be trustworthy than those that sell less because larger firms have more to lose if consumers decide they have behaved badly. That assumption has been called into question by recent work that shows that, under the standard infinitely repeated game model of reputation, reputational economies of scale will occur only under special conditions, such as monopoly, because larger firms not only have more to lose from behaving badly, but also more to gain. This article shows that reputational economies of scale exist even when there is competition and without other special conditions, if the probability that low quality is detected is positively correlated with the quantity of the good or service sold. It also shows that reputational economies of scale exist, under some circumstances, in a finite-horizon model of reputation. Reputational economies of scale help explain why law and accounting firms can act as gatekeepers, why mass market products are more likely to be safe, why firms are less likely to exploit one-sided contracts than consumers, and why manufacturers market new products under the umbrella of established trademarks.

Keywords: reputation, repeat-play, economies of scale, gatekeeper, product liability, umbrella trademark

JEL Classification: K12, K13, K22, K32, D86, O34

Suggested Citation

Klerman, Daniel M. and de Figueiredo, Miguel, Reputational Economies of Scale (October 8, 2020). USC Law Legal Studies Paper No. 18-7, USC CLASS Research Paper No. CLASS18-7, Available at SSRN: https://ssrn.com/abstract=3155339 or http://dx.doi.org/10.2139/ssrn.3155339

Daniel M. Klerman (Contact Author)

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-7973 (Phone)
213-740-5502 (Fax)

HOME PAGE: http://weblaw.usc.edu/contact/contactInfo.cfm?detailID=227

Miguel De Figueiredo

University of Connecticut - School of Law ( email )

65 Elizabeth Street
Hartford, CT 06105
United States

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