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Investments in Quality, Collective Reputation and Information Acquisition

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  • Fulvio Fontini

    ()
    (Department of Economics and Management - Università degli Studi di Padova - University of Padua)

  • Katrin Millock

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Michele Moretto

    ()
    (Department of Economics and Management - Università degli Studi di Padova - University of Padua)

Abstract

In many cases consumers cannot observe firms' investment in quality or safety, but have only beliefs on the average quality of the industry. In addition, the outcome of the collective investment game of the firms may be stochastic since firms cannot control perfectly the technology or external factors that may affect production. In such situations, when only consumers' subjective perceptions of the industry level of quality matters, the regulator may make information available to firms or subsidize their information acquisition. Under what conditions is it desirable to make information available? We show how firms' overall level of investment in quality depends upon the parameters of the quality accumulation process, the cost of investment and the number of firms in the industry. We also show the potentially negative effects on the total level of quality from providing information on consumers' actual valuation.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00825782.

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Date of creation: May 2013
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Handle: RePEc:hal:cesptp:halshs-00825782

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Keywords: Collective reputation; option value; quality;

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