Post-Sale Service and the Limits of Reputation

Industrial and Corporate Change, 2013

45 Pages Posted: 15 May 2009 Last revised: 4 Mar 2013

See all articles by Scott E. Masten

Scott E. Masten

University of Michigan, Stephen M. Ross School of Business

Renata Kosova

Imperial College London

Date Written: May 10, 2009

Abstract

In the standard durable-goods-quality model (e.g., Klein and Leffler, 1981; Shapiro, 1982, 1983), the prospect of repeat sales is often adequate to support the provision of high-quality durable goods even when quality is not observable at the time of purchase. We show that when durable goods require costly post-sale service, a reputational equilibrium may not exist at any price, even with a flow of profitable new sales indefinitely into the future. More generally, we characterize the size of the premium needed to make promises to provide post-sale service self enforcing. We then apply the model to United Shoe Machinery, IBM, and Xerox, using historical records to estimate the self-enforcing post-sale service premia that would have been necessary for each of these companies.

Keywords: reputation, durable goods, post-sale service

JEL Classification: L14, L15, L63, L64

Suggested Citation

Masten, Scott E. and Kosova, Renata, Post-Sale Service and the Limits of Reputation (May 10, 2009). Industrial and Corporate Change, 2013 , Available at SSRN: https://ssrn.com/abstract=1404907 or http://dx.doi.org/10.2139/ssrn.1404907

Scott E. Masten (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-1389 (Phone)
815-572-8207 (Fax)

Renata Kosova

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
163
Abstract Views
1,365
rank
247,027
PlumX Metrics