Market Size, Firm Size and Reputation for Quality

Abstract

We analyze the effect of firm’s size on firm’s ability to establish a reputation forquality. We consider markets in which consumers may be informed about a firm’s pastquality through word of mouth referrals from past customers. In this setting consumersare more likely to become informed the greater the firm’s market share. This leadsto a theory of equilibrium firm size which is consistent with findings that firm sizeincreases with market size (Campbell and Hopenhayn, 2005) and the long tail hypothesis(Anderson, 2008).

Keywords: firm size, market size, reputation for quality