Is Bigger Better? Customer Base Expansion Through Word-of-Mouth Reputation

Posted: 15 Sep 2005

See all articles by Rafael Rob

Rafael Rob

University of Pennsylvania - Department of Economics

Arthur Fishman

Bar-Ilan University - Department of Economics

Abstract

A model of gradual reputation formation through a process of continuous investment in product quality is developed. We assume that the ability to produce high-quality products requires continuous investment and that as a consequence of informational frictions, such as search costs, information about firms' past performance diffuses only gradually in the market. This leads to a dual process of growth of a firm's customer base and an increase in the firm's investment in quality. The model predicts, therefore, that the longer its tenure as a high-quality producer, the more a firm invests in quality. We relate this finding to empirical work on online commerce as well as on traditional industries.

Suggested Citation

Rob, Rafael and Fishman, Arthur, Is Bigger Better? Customer Base Expansion Through Word-of-Mouth Reputation. Journal of Political Economy, Vol. 113, pp. 1146-1162, October 2005, Available at SSRN: https://ssrn.com/abstract=799968

Rafael Rob (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

Arthur Fishman

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

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