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Reputation building through costly adjustment

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  • Dilmé, Francesc

Abstract

This paper analyzes quality and reputation management in the presence of adjustment costs. A firm produces and sells experience goods over time. The firm can choose the product quality at any time, but changing it requires a costly investment. Customers learn about the product quality through a quality-dependent Poisson process. We characterize reputational dynamics, showing that the arrival of news may generate jumps in both the firm's quality choice and its reputation. We characterize the set of equilibria as a function of the adjustment costs, and show that the firm can benefit from increased adjustment costs as such costs enhance the credibility of its decisions.

Suggested Citation

  • Dilmé, Francesc, 2019. "Reputation building through costly adjustment," Journal of Economic Theory, Elsevier, vol. 181(C), pages 586-626.
    • Handle: RePEc:eee:jetheo:v:181:y:2019:i:c:p:586-626
    DOI: 10.1016/j.jet.2019.03.010
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    Cited by:

    1. Chong Huang & Fei Li & Xi Weng, 2020. "Star Ratings and the Incentives of Mutual Funds," Journal of Finance, American Finance Association, vol. 75(3), pages 1715-1765, June.

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    More about this item

    Keywords

    Reputation; Adjustment costs; Endogenous types;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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