Reputation Failure: The Limits of Market Discipline in Consumer Markets
66 Pages Posted: 10 Sep 2018 Last revised: 19 Feb 2020
Date Written: August 28, 2018
Many believe that consumer-sourced reputational information about products would increasingly replace top-down regulation. Instead of protecting consumers through coercive laws, reputational information gleaned from the wisdom of the crowd would guide consumer decision making. There is now a growing pressure to deregulate in diverse fields such as contracts, products liability, consumer protection, and occupational licensing.
This Article presents a common failure mode of systems of reputation: “Reputation Failure.” By spotlighting the public-good nature of reviews, rankings, and even gossip, this Article shows the mismatch between the private incentives consumers have to create reputational information and its social value. As a result of this divergence, reputational information is beset by participation, selection, and social desirability biases that systematically distort it. The Article argues that these distortions are inherent to most systems of reputation and that they make reputation far less reliable than traditionally understood.
The limits of reputation highlight the centrality of the law to the future of the marketplace. Proper legal institutions can deal not only with the symptoms of reputation failure — consumer mistakes — but improve the flow and quality of reputational information, thus correcting reputation failures before they arise. The Article offers a general framework and explores a number of strategies. A more robust system of reputation can preserve consumer autonomy without sacrificing consumer welfare.
Keywords: Market Discipline, Reputation, Contracts, Torts, Consumer Protection, Game Theory, Monte Carlo, Law and Economics
JEL Classification: L14, K12, K13, D11, D40, D62, D83, D64, K20
Suggested Citation: Suggested Citation