Three essays in applied microeconomic theory

When firms have more information than their customers about the quality being provided, customers may experience bad outcomes. V6e consider three environments in which, though customers do not directly observe firm effort, reputational concerns drive firms to exert high effort.;Chapter 1 considers a model in which firms are ex ante indistinguishable, yet differ in effectiveness at serving any given customer. Customers will fire firms thought to be ineffective and move on. A firm's desire to retain as many customers as possible motivates it to exert costly effort, which is probabilistically correlated with quality. We identify a novel channel through a firm's effort increase in the number of competitors it faces. The more competitive the market, the less patient customers will be with poor outcomes, the higher customer turnover will be, spurring firms to work harder to impress impatient customers. Equilibrium firm effort is increasing in market competitiveness; competition increases customer surplus and helps balance the informational advantages of firms.;Chapter 2 models a market for experts' services in which customers cannot tell true experts from imitative quacks, ex ante, though experts will, on average, produce better results. Firms choose whether to make a costly investment in their own expertise or whether to coast on their inherited reputation, as a quack. Customers observe outcomes, but not type, and fire their matched firm if outcomes become sufficiently bad. Correct beliefs that all agents are quacks always comprise an equilibrium of this model. However, the proportion of firms who actually are experts is bounded away from one in any equilibrium. Any industry always has at least some quacks.;In chapter 3, customers are short-lived, yet can solicit information on firms by word of mouth. The speed of information diffusion is increasing in a firm's market share---information spreads more quickly about large firms than small firms. This customer communication prompts firms to worry about their reputation, large firms more than small firms. Chapter 1 produces an inverse relationship between size and effort, which runs counter to the literature; this chapter sheds light on bridging this gap.