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Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent

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  • Wujin Chu

    (Seoul National University, Office of the President, Republic of Korea)

  • Woosik Chu

    (Seoul National University, Office of the President, Republic of Korea)

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    Abstract

    This paper gives an example of renting the reputation of another agent to signal quality. We show that in a “maximally” separating equilibrium, manufacturers of high quality products distribute through retailers with strong reputation (reputable retailers), while manufacturers of low quality products distribute through retailers with no reputation (discounters). In this way, even if high quality manufacturers have no reputation of their own to post as bond, they can signal quality by posting the reputation of the retailers. In equilibrium, reputable retailers never default on their reputation. We also show that it pays the retailers to invest in reputation, as reputable retailers earn profits bounded away from zero under endogenous sequential entry, while the discounters' profits are zero.

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    File URL: http://dx.doi.org/10.1287/mksc.13.2.177
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 13 (1994)
    Issue (Month): 2 ()
    Pages: 177-189

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    Handle: RePEc:inm:ormksc:v:13:y:1994:i:2:p:177-189

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    Related research

    Keywords: channels of distribution; signaling game; retailing; quality perception; product quality;

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    Cited by:
    1. Cole, Anne & Harris, Jane, 2005. "Rising interest in credence qualities in agricultural products and the role for government," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137828, Australian Agricultural and Resource Economics Society.
    2. Abhishek & Koshy, Abraham, . "Quality Perceptions of Private Label Brands: Conceptual Framework and Agenda for Research," IIMA Working Papers WP2008-02-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Paolo G. Garella & Martin Peitz, 2000. "Intermediation Can Replace Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 1-24, 03.
    4. Animesh Animesh & Vandana Ramachandran & Siva Viswanathan, 2005. "Quality Uncertainty And Adverse Selection In Sponsored Search Markets," Working Papers 05-27, NET Institute, revised Oct 2005.
    5. Matos Cámara Rafael Fabricio & San Martín Gutiérrez Sonia, 2012. "Análisis sobre la reputación de marca, las emociones y la confianza como formadoras de la satisfacción del turista," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 57(4), pages 253-286, octubre-d.
    6. Abraham Koshy & . Abhishek, 2010. "Quality Perceptions of Private Label Brands Conceptual Framework and Agenda for Research," Working Papers id:2756, eSocialSciences.
    7. Carlyle Farrell & Gervan Fearon, 2005. "Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 285-296, September.
    8. Clerides, Sofronis & Nearchou, Paris & Pashardes, Panos, 2005. "Intermediaries as Bundlers, Traders and Quality Assessors: The Case of UK Tour Operators," CEPR Discussion Papers 5038, C.E.P.R. Discussion Papers.
    9. Jin, Yanhong H. & Zilberman, David & Heiman, Amir, 2005. "Choosing Brands: Fresh Produce versus other Products," 2005 Annual meeting, July 24-27, Providence, RI 19192, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Paolo Giorgio GARELLA & Martin PEITZ, 2006. "Alliances between competitors and consumer information," Departmental Working Papers 2006-41, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    11. Choi, Jay Pil, 2003. "Bundling new products with old to signal quality, with application to the sequencing of new products," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1179-1200, October.
    12. Martin Peitz & Paolo G. Garella, 1999. "- Exclusive Dealing Clauses Facilitate Entry," Working Papers. Serie AD 1999-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    13. Martin Peitz, 2000. "Exclusionary Practices and Entry Under Asymmetric Information," Econometric Society World Congress 2000 Contributed Papers 1197, Econometric Society.
    14. Sofronis Clerides & Paris Nearchou & Panos Pashardes, 2004. "Intermediaries as Quality Assessors in Markets with Asymmetric," University of Cyprus Working Papers in Economics 3-2004, University of Cyprus Department of Economics.
    15. Clerides, Sofronis & Nearchou, Paris & Pashardes, Panos, 2008. "Intermediaries as quality assessors: Tour operators in the travel industry," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 372-392, January.

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