Quality and Reputation: Is Competition Beneficial to Consumers?
AbstractIn this paper we develop a model of product quality and firms' reputation. If quality is not verifiable and there is repeated interaction between firms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that competitive firms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner's (2002) one. Positive profit are generated in equilibria characterized by the emergence of a social norm which prescribes a minimum quality level. Moreover, we demonstrate that more concentrated industry structures deliver better quality and higher social and consumer welfare. This finding should induce cautiousness in enhancing competition when product quality is at stake. We derive our results in the specific context of after-sales service quality provided by insurance companies. Yet, we argue that our analysis is of general applicability.
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Bibliographic InfoPaper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia dell'Impresa e del Lavoro with number ieil0061.
Date of creation: Oct 2010
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Web page: http://www.unicatt.it/Istituti/EconomiaImpresaLavoro
More information through EDIRC
quality; reputation; Bertrand competition; insurance contracts.;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-16 (All new papers)
- NEP-BEC-2011-04-16 (Business Economics)
- NEP-COM-2011-04-16 (Industrial Competition)
- NEP-IAS-2011-04-16 (Insurance Economics)
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.:
- Cappellari, Lorenzo, 2000. "The Covariance Structure of Italian Male Wages," Manchester School, University of Manchester, vol. 68(6), pages 659-84, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lorenzo Cappellari).
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