Consumer networks and firm reputation
A first experimental investigation
*
Steffen Huck, Gabriele K. Lünser and Jean-Robert Tyran
November 2007
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 neighbors 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
Trust; Consumer networks; Moral hazard; Information conditions; Reputation
JEL Classification Codes
C72; C92; D40; L14
* Huck & Lünser: Dept. of Economics and ELSE, University College London, Gower St, London WC1E 6BT,
email [email protected] / [email protected]; Tyran: Dept. of Economics, University of Copenhagen, and
CEPR, London [email protected]. Huck and Lünser acknowledge financial support from the
Economic and Social Research Council (UK) via ELSE and an additional grant on “Trust and competition”.
Huck is also grateful for additional funding by the Leverhulme Trust. Tyran acknowledges support by FSE,
Denmark.