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Competition and Reputation

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  • Ramon Marimon

    (European University Institute)

Abstract

In this paper we analyze the interaction of two disciplinary mechanisms: competition and reputation. We first study a dynamic model of monopolistic competition with experienced goods (i.e., quality is observed after goods are purchased). When market power is high enough, reputation results in the equilibrium with perfect information being sustainable. If consumers' expectations satisfy a weak regularity condition, then there is a unique sequential equilibrium with quality goods being produced and the price has a mark-up which is either the full information monopolistic mark-up or, if this is not sustainable (e.g., when goods are very close substitutes), the rate of time preference, that acts as a reputation constraint. A variation of the model allows us to study the private provision of currencies. In particular, we inquire whether Bertrand competition between profit maximizing currency issuers would drive inflation rates to the efficient outcome, as suggested prominently by Hayek. We show that, unless firms can commit to future actions, the efficient outcome is never attained. Without full commitment, equilibria with deflation -as implied by the Friedman rule- can not be sustained, however, if currencies are close substitutes (and beliefs regular) the equilibrium inflation rate is zero.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1384.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1384

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Cited by:
  1. Ramon Marimon, 2000. "Review of Sargent's The Conquest of American Inflation," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 405-411, June.
  2. Ramon Marimon & Juan Pablo Nicolini & Pedro Teles, 2003. "Inside-outside money competition," Working Paper Series WP-03-09, Federal Reserve Bank of Chicago.

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