Market size, firm size and reputation for quality

We analyze the effect of firm's size on firm's ability to establish a reputation for quality. We consider markets in which consumers may be informed about a firm's past quality through word of mouth referrals from past customers. In this setting consumers are more likely to become informed the greater the firm's market share. This leads to a theory of equilibrium firm size which is consistent with findings that firm size increases with market size (Campbell and Hopenhayn, 2005) and the long tail hypothesis (Anderson, 2008).