Herding behaviour and the size of customer base as a commitment to quality

This paper refers to herding behaviour as developed in Bikhchandani ct 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.