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Reputation and Competition

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Author Info
Johannes Horner
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. (JEL C7, D8)

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File URL: http://hdl.handle.net/10.1257/00028280260136444
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 3 (June)
Pages: 644-663
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Handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:644-663

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier. [Downloadable!] (restricted)
  2. George J. Mailath & Larry Samuelson, 1998. "Your Reputation Is Who You're Not, Not Who You'd Like To Be," CARESS Working Papres rep-is-sep, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences. [Downloadable!]
    Other versions:
  3. repec:att:wimass:19199818 is not listed on IDEAS
  4. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May. [Downloadable!] (restricted)
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  5. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August. [Downloadable!] (restricted)
  6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  7. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November. [Downloadable!] (restricted)
  8. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-85, May. [Downloadable!] (restricted)
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  9. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Blackwell Publishing, vol. 51(2), pages 197-207, April. [Downloadable!] (restricted)
  10. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December. [Downloadable!] (restricted)
  11. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  12. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 169-82, January. [Downloadable!] (restricted)
  13. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Martinelli, Cesar, 1997. "Small firms, borrowing constraints, and reputation," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 91-105, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Costa, Luis Almeida e & Vasconcelos, Luis, 2008. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," FEUNL Working Paper Series wp539, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  2. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the Interaction of Enforcement Institutions," The Warwick Economics Research Paper Series (TWERPS) 748, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  3. Ichiro Obara, 2004. "Firm Reputation and Horizontal Integration (with H. Cai)," UCLA Economics Online Papers 318, UCLA Department of Economics. [Downloadable!]
  4. Hongbin Cai & Ichiro Obara, 2006. "Firm Reputation and Horizontanl Integration," Levine's Bibliography 321307000000000285, UCLA Department of Economics. [Downloadable!]
    Other versions:
  5. Alan Morrison & William J. Wilhelm, Jr., 2003. "Partnership Firms, Reputation and Human Capital," OFRC Working Papers Series 2003fe02, Oxford Financial Research Centre. [Downloadable!]
  6. Alan D. Morrison & William J. Wilhelm, 2004. "Partnership Firms, Reputation, and Human Capital," American Economic Review, American Economic Association, vol. 94(5), pages 1682-1692, December. [Downloadable!]
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