Reciprocity, Social Ties, and Competition in Markets for Experience Goods
University of Copenhagen Economics Working Paper No. 04-12
23 Pages Posted: 19 Apr 2005
Date Written: 2004
Reciprocal customers may disproportionately improve the performance of markets for experience goods. Reciprocal customers reward (punish) firms for providing good (bad) quality by upholding (terminating) the customer relation. This may induce firms to provide good quality which, in turn, may induce a positive externality for nonreciprocal customers who would, in the absence of reciprocal types, face market breakdown. This efficiency-enhancing effect of reciprocity is boosted when there are social ties between consumers and competition between firms. The existence of social ties or competition alone does not improve market performance.
Keywords: Social networks, reputation, reciprocity, experience goods, customer loyalty
JEL Classification: D43, L14, Z13
Suggested Citation: Suggested Citation