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Selling Reputation When Going out of Business

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  • Hakenes, Hendrik

    ()
    (Sonderforschungsbereich 504)

  • Peitz, Martin

    ()
    (International University in Germany)

Abstract

Is the reputation of a firm tradeable when the previous owner has to retire even though ownership change is observable? We consider a competitive market in which a share of owners must retire in each period. New owners, observing only recent profits, bid for the firms that are for sale. Customers are concerned with the owners' type, which reflects the quality of the good or service provided. When a customer observes an ownership change, he may have an incentive to switch to a different firm, even if his past experience was good. However, we show that, in equilibrium, customers believe that the new owner is also good. Hence reputation is tradeable, although ownership change is observable. In our model, reputation is an intangible asset, embodied in an attractive customer base. Firms with good owners sell at a premium.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-52.

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Length: 38 pages
Date of creation: 26 Nov 2004
Date of revision:
Handle: RePEc:xrs:sfbmaa:04-52

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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  1. Steven Tadelis, 2002. "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 854-882, August.
  2. Choi, Jay Pil, 1998. "Brand Extension as Informational Leverage," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 655-69, October.
  3. Mailath, George J & Samuelson, Larry, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 415-41, April.
  4. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, vol. 89(3), pages 548-563, June.
  5. Lawrence M. Ausubel & Peter Cramton & Raymond J. Deneckere, 2002. "Bargaining with Incomplete Information," Papers of Peter Cramton 02barg, University of Maryland, Department of Economics - Peter Cramton, revised 12 Mar 2001.
  6. Luis Cabral, 2000. "Stretching Firm and Brand Reputation," Working Papers 00-07, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Aumann, Robert J. & Heifetz, Aviad, 2001. "Incomplete Information," Working Papers 1124, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  9. Andersson, Fredrik, 2002. "Pooling reputations," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 715-730, May.
  10. Rafael Rob, 2004. "Is Bigger Better? Investing in Reputation," Theory workshop papers 658612000000000086, UCLA Department of Economics.
  11. Steven Tadelis, 2003. "Firm reputation with hidden information," Economic Theory, Springer, vol. 21(2), pages 635-651, 03.
  12. Gschwend, Thomas, 2004. "Ticket-Splitting and Strategic Voting," Sonderforschungsbereich 504 Publications 05-06, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  13. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
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