We construct a model in which a firm's reputation must be built gradually, is managed, and dissipates gradually unless appropriately maintained. Consumers purchase an experience good from a firm whose unobserved effort affects the probability distribution of consumer utilities. Consumers observe private, noisy signals (consumer utilities) of the behavior of the firm, yielding a game of imperfect private monitoring} The standard approach to reputations introduces some "good" or "Stackelberg" firms into the model, with consumers ignorant of the type of the firm they face and with ordinary firms acquiring their reputations by masquerading as Stackelberg firms. In contrast, the key ingredient of our reputation model is the continual possibility that the ordinary or "competent" firm might be replaced by a "bad" or "inept" firm who never chooses the Stackelberg action. Competent firms then acquire their reputations by convincing consumers that they are not inept. Building a reputation is an exercise in separating oneself from inept firms who one is not, rather than pooling with Stackelberg firms who one would like to be. We investigate how a firm manages such a reputation, showing, among other features, that a competent firm may not always choose the most efficient effort level to distinguish itself from an inept one.
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Paper provided by University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences in its series CARESS Working Papres with number
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Jeffrey C. Ely & Juuso Valimaki, 2002.
"Bad Reputation,"
Discussion Papers
1348, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Jeffery Ely & Drew Fudenberg & David Levine, 2002.
"When is Reputation Bad?,"
Discussion Papers
1358, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]
Other versions: