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Alliances between competitors and consumer information

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  • Paolo Giorgio GARELLA

    ()

  • Martin PEITZ

    ()

Abstract

Alliances between competitors in which established firms provide access to proprietary resources, e. g. their distribution channels, are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certificies the rival's product. Consumers infer that firm B is a competitor with high quality, as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices

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Bibliographic Info

Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2006-41.

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Date of creation: 20 Dec 2006
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Handle: RePEc:mil:wpdepa:2006-41

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Keywords: alliances; brand sharing; asymmetric information; signaling; exclusion; moral hazard; entry assistan;

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  1. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September.
  2. Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
  3. Paolo Garella & Martin Peitz, . "Alliances between competitors and consumer information," Working Papers 0613, University of Crete, Department of Economics, revised 01 2006.
  4. Pashigian, B Peter & Gould, Eric D, 1998. "Internalizing Externalities: The Pricing of Space in Shopping Malls," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 115-42, April.
  5. Sean Nicholson, 2005. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1433-1464, July.
  6. Paolo G. Garella & Martin Peitz, 2000. "Intermediation Can Replace Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 1-24, 03.
  7. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
  8. Carlin, Barbara A. & Dowling, Michael J. & Roering, William D. & Wyman, John & Kalinoglou, John & Clyburn, Greg, 1994. "Sleeping with the enemy: Doing business with a competitor," Business Horizons, Elsevier, vol. 37(5), pages 9-15.
  9. Gary Biglaiser & James W. Friedman, 1999. "Adverse Selection with Competitive Inspection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 1-32, 03.
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Cited by:
  1. Paolo Giorgio GARELLA & Martin PEITZ, 2006. "Alliances between competitors and consumer information," Departmental Working Papers 2006-41, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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