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

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 predecessors decided 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 the customer?s "private" information rather than one that relies on an informational cascade