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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

Suggested Citation

  • 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.
    • Handle: RePEc:mil:wpdepa:2006-41
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    Cited by:

    1. Xiao Huang & Tamer Boyacı & Mehmet Gümüş & Saibal Ray & Dan Zhang, 2016. "United We Stand or Divided We Stand? Strategic Supplier Alliances Under Order Default Risk," Management Science, INFORMS, vol. 62(5), pages 1297-1315, May.
    2. Choi, Jay Pil & Peitz, Martin, 2018. "You are judged by the company you keep: Reputation leverage in vertically related markets," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 351-379.
    3. Paolo G. Garella & Martin Peitz, 2007. "Alliances between Competitors and Consumer Information," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 823-845, June.

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    More about this item

    Keywords

    alliances; brand sharing; asymmetric information; signaling; exclusion; moral hazard; entry assistan;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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