Why reputation is not always beneficial: Tolerance and opportunism in business networks

Many researchers in economics as well as sociology have stressed the important role of business networks for cooperation, trust, and performance. This claim is based on solid theoretical arguments as well as empirical findings. However, neither theory nor the selective empirical results support the view that networks are always beneficial for economic transactions. This paper begins with an observation that for the purchase of IT products, network embeddedness leads to even more problems for the customer. In order to explain this effect, possible reasons for this phenomenon are discussed using theory as well as empirics. The most promising explanation for this special case is the effect of uncertainty and incomplete information ex post. In order to reduce this uncertainty, the buyer forms beliefs on the basis of the opinions existing in a shared network or group. However, if the network members have the same problem of uncertainty, suppliers have an incentive to reduce their performance because such behavior will not be detected and sanctioned. An analysis of the customer's tolerance to a supplier's behavior in business transactions yields support for this argument. Even if problems in a transaction are kept constant, customers give suppliers more reputational credit if they share a common network.