Bernardo A. Huberman and Fang Wu
HP Laboratories and Stanford University
Palo Alto, CA 94304
Abstract
We study the endogenous dynamics of reputations in a system
consisting of firms with long horizons that provide goods or
services with varying levels of quality, and large numbers of
customers who assign to them reputations on the basis of the
quality levels that they experience when interacting with them.
We show that for given discounts of the past on the part of the
customers, and of effort levels on the part of the firms, the
dynamics can lead to either well defined equilibria or persistent
nonlinear oscillations in the number of customers visiting a firm,
implying unstable reputations. We establish the criteria under
which equilibria are stable and also show the existence of large
transients which can also render fixed points unattainable within
reasonable times. Moreover we establish that the time scales for
the buildup and decay of reputations in the case of private
information are much longer that those involving public
information. This provides a plausible explanation for the rather
sudden increase and collapse of reputations in a number of much
publicized cases.
Full paper: reputation.pdf
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