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Selling Reputation When Going out of Business, June 2004

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Author Info
Hendrik Hakenes ()
Martin Peitz ()

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Abstract

Is the reputation of a firm tradeable when the previous owner has to retire even though ownership change is observable? We consider a competitive market in which a share of owners must retire in each period. New owners, observing only recent profits, bid for the firms on sale. Customers are concerned with the owners’ type, which reflects the quality of the good or service provided. When a customer observes an ownership change, he may have an incentive to switch to a different firm even if his past experience was good. However, we show that, in equilibrium, customers believe that also the new owner is of the good type. Hence reputation is tradeable, although ownership change is observable. In our model, reputation is an intangible asset, embodied in an attractive customer base. Firms owned by a good type sell at a premium.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1213.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1213

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Related research
Keywords: reputation; ownership change; intangible asset; theory of the firm;

Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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References listed on IDEAS
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. Andersson, Fredrik, 2002. "Pooling reputations," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 715-730, May. [Downloadable!] (restricted)
  2. Choi, Jay Pil, 1998. "Brand Extension as Informational Leverage," Review of Economic Studies, Blackwell Publishing, vol. 65(4), pages 655-69, October. [Downloadable!] (restricted)
    Other versions:
  3. Arthur Fishman & Rafael Rob, 2002. "Is Bigger Better? Investing in Reputation," Penn CARESS Working Papers 40893328535d25cf3e69a981a, Penn Economics Department. [Downloadable!]
  4. Cabral, L.M.B., 2000. "Stretching Firm and Brand Reputation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 00-07, New York University, Leonard N. Stern School of Business-.
    Other versions:
  5. George J. Mailath & Larry Samuelson, . ""Who Wants a Good Reputation?''," CARESS Working Papres 98-12, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    Other versions:
  6. Steven Tadelis, 2002. "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 854-882, 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. Steven Tadelis, 2003. "Firm reputation with hidden information," Economic Theory, Springer, vol. 21(2), pages 635-651, 03. [Downloadable!] (restricted)
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