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Reputation-Driven Industry Dynamics

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  • Bernardita Vial
  • Felipe Zurita

Abstract

This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past firm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that firms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active firms: firms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger firms, for inept firms, and for firms with worse reputations. Competent firms have stochastically larger reputations than inept firms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 436.

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Date of creation: 2013
Date of revision:
Handle: RePEc:ioe:doctra:436

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Keywords: reputation; industry dynamics; free entry; exit and entry rates;

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References

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  1. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 231-251.
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Cited by:
  1. Bernardita Vial & Felipe Zurita, 2013. "Incentives and Reputation when Names can be Replaced: Valjean Reinvented as Monsieur Madeleine," Documentos de Trabajo 447, Instituto de Economia. Pontificia Universidad Católica de Chile..

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