Article | Journal of Industrial Economics | September 1989

Fly-by-Night Firms and the Market for Product Reviews

by Gerald R. Faulhaber and Dennis A. Yao

Abstract

This paper presents a model that permits third-party information provision in a market characterized by information asymmetries and reputation formation. The model is used to examine how the market for information provision affects prices and supply in the primary market. We find that decreasing the cost of providing and using information (i) increases rather than decreases the margins received by reputable service firms, (ii) decreases the price of new, untested service firms (so reputation is more costly to build), and (iii) leads to more high-quality firms and less "fly-by-night" firms.

Keywords: Markets; Reputation; SWOT Analysis; Mathematical Methods; Price Bubble; Inflation and Deflation; Duopoly and Oligopoly; Cost; Information; Quality; Price; Competitive Advantage; Information Industry;

Citation:

Faulhaber, Gerald R., and Dennis A. Yao. "Fly-by-Night Firms and the Market for Product Reviews." Journal of Industrial Economics 38 (September 1989): 65–77. (Harvard users click here for full text.)