Herding Behaviour and the Size of Customer Base as a Commitment to Quality

Chong Ju Choi, Xeni Dassiou and Stephen Gettings

Economica, 2000, vol. 67, issue 267, 375-398

Abstract: This paper refers to herding behaviour as developed in Bikhchandani et al. (1992), Bannerjee (1992) and Choi and Scarpa (1994). We examine the behaviour of a potential customer who does not know how many of her predecessorsdecided not to purchase the product. We show that, ceteris paribus,a smaller (larger) customer base increases the likelihood of a positive(negative) cascade. Hence, a firm can signal its commitment to high quality(Schelling 1960) by choosing to develop a customer base that relies upon thecustomer's ‘private’ information rather than one that relies on an informational cascade.

Date: 2000
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