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Reputation and Competition

Reputation and Competition This paper shows how competition generates reputation-building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms' effort level. There are two types of firms and “good” firms try to distinguish themselves from “bad” firms. Although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms, competition endogenously generates the outside option inducing disappointed consumers to leave firms. This threat of exit induces good firms to choose high effort, allowing good reputations to be valuable, but its uncompromising execution forces good firms out of the market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Reputation and Competition

American Economic Review , Volume 92 (3) – Jun 1, 2002

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Publisher
American Economic Association
Copyright
Copyright © 2002 by the American Economic Association
ISSN
0002-8282
DOI
10.1257/00028280260136444
Publisher site
See Article on Publisher Site

Abstract

This paper shows how competition generates reputation-building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms' effort level. There are two types of firms and “good” firms try to distinguish themselves from “bad” firms. Although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms, competition endogenously generates the outside option inducing disappointed consumers to leave firms. This threat of exit induces good firms to choose high effort, allowing good reputations to be valuable, but its uncompromising execution forces good firms out of the market.

Journal

American Economic ReviewAmerican Economic Association

Published: Jun 1, 2002

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