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Alliances between competitors and consumer information

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Author Info
Paolo Giorgio GARELLA ()
Martin PEITZ ()

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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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Publisher Info
Paper provided by Department of Economics University of Milan Italy in its series Departemental 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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Related research
Keywords: alliances; brand sharing; asymmetric information; signaling; exclusion; moral hazard; entry assistan;

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Find related papers by 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 - - Business Economics - - - Business Economics
M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pashigian, B Peter & Gould, Eric D, 1998. "Internalizing Externalities: The Pricing of Space in Shopping Malls," Journal of Law & Economics, University of Chicago Press, vol. 41(1), pages 115-42, April.
  2. Martin Peitz & Paolo G. Garella, 1999. "- Intermediation Can Replace Certification," Working Papers. Serie AD 1999-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  3. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. 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, 06. [Downloadable!] (restricted)
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  6. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer. [Downloadable!] (restricted)
  7. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September. [Downloadable!] (restricted)
  8. Gary Biglaiser & James W. Friedman, 1999. "Adverse Selection with Competitive Inspection," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 8(1), pages 1-32, 03. [Downloadable!] (restricted)
  9. Joseph Farrell, 1986. "Moral Hazard as an Entry Barrier," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 440-449, Autumn. [Downloadable!] (restricted)
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  10. Sean Nicholson & Patricia M. Danzon & Jeffrey McCullough, 2002. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," NBER Working Papers 9007, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Paolo Giorgio GARELLA & Martin PEITZ, 2006. "Alliances between competitors and consumer information," Departemental Working Papers 2006-41, Department of Economics University of Milan Italy. [Downloadable!]
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