Consumer Networks and Firm Reputation: A First Experimental Investigation

Abstract

Arguing that consumers are the carriers of firms' reputations, we examine the role of consumer networks for trust in markets that suffer from moral hazard. When consumers are embedded in a network, they can exchange information with their neighbours about their private experiences with different sellers. We find that such information exchange fosters firms' incentives for reputation building and, thus, enhances trust and efficiency in markets. This efficiency-enhancing effect is already achieved with a rather low level of network density.

Keywords: Consumer network, information conditions, moral hazard, reputation, trust

JEL Classification: C72, C92, D40, L14