"Fly-By-Night" Firms and the Market for Product Reviews

Gerald R Faulhaber and Dennis A Yao

Journal of Industrial Economics, 1989, vol. 38, issue 1, 65-77

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. They find that decreasing the cost of providing and using information (1) increases, rather than decreases, the margins received by reputable service firms; (2) decreases the price of new, untested service firms (so reputation is more costly to build); and (3) leads to more high-quality firms and less " fly-by-night" firms. Copyright 1989 by Blackwell Publishing Ltd.

Date: 1989
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