Reputation and Turnover
AbstractWe consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm’s investment. We focus on dynamic reputation equilibria, whereby consumers ‘discipline’ a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers’ tolerance level - the level of product quality below which consumers switch to the rival firm - and firms’ investment in quality. Given consumers’ tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, layoffs that our equilibria sustain.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-032.
Length: 28 pages
Date of creation: 04 Apr 2004
Date of revision:
Reputation; consumer switching; moral hazard; repeated games;
Other versions of this item:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-02 (All new papers)
- NEP-CFN-2005-01-02 (Corporate Finance)
- NEP-IND-2005-01-02 (Industrial Organization)
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