IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v92y2002i3p644-663.html
   My bibliography  Save this article

Reputation and Competition

Author

Listed:
  • Johannes Hörner

Abstract

This paper shows how competition generates reputation-building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms' effort level. There are two types of firms and "good" firms try to distinguish themselves from "bad" firms. Although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms, competition endogenously generates the outside option inducing disappointed consumers to leave firms. This threat of exit induces good firms to choose high effort, allowing good reputations to be valuable, but its uncompromising execution forces good firms out of the market. (JEL C7, D8)

Suggested Citation

  • Johannes Hörner, 2002. "Reputation and Competition," American Economic Review, American Economic Association, vol. 92(3), pages 644-663, June.
  • Handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:644-663
    Note: DOI: 10.1257/00028280260136444
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/00028280260136444
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    2. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    3. 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.
    4. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
    5. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-385, May.
    6. George J. Mailath & Larry Samuelson, "undated". "Your Reputation Is Who You're Not, Not Who You'd Like To Be," Penn CARESS Working Papers bb1b279d6539c9ed3b83a027c, Penn Economics Department.
    7. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    8. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    9. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
    10. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
    11. Drew Fudenberg & David M. Kreps, 1987. "Reputation in the Simultaneous Play of Multiple Opponents," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 541-568.
    12. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 415-441.
    13. Russell Cooper & Thomas W. Ross, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 197-207.
    14. Martinelli, Cesar, 1997. "Small firms, borrowing constraints, and reputation," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 91-105, May.
    15. 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 615-641, August.
    16. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    17. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    18. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luís Almeida Costa & Luís Vasconcelos, 2010. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 259-301, June.
    2. Vlassopoulos, Michael, 2009. "Quality, reputation and the choice of organizational form," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 515-527, August.
    3. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 816-852.
    4. Antonelli, Cristiano, 2017. "From the Economics of Information to the Economics of Knowledge. Length: pages 39," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201714, University of Turin.
    5. Dhillon, Amrita & Rigolini, Jamele, 2011. "Development and the interaction of enforcement institutions," Journal of Public Economics, Elsevier, vol. 95(1), pages 79-87.
    6. Chee Leong, 2012. "A Dynamic Game of Reputation and Economic Performances in Nondemocratic Regimes," Dynamic Games and Applications, Springer, vol. 2(4), pages 385-400, December.
    7. Marcel Fafchamps & Ruth Vargas Hill & Bart Minten, 2008. "Quality control in nonstaple food markets: evidence from India," Agricultural Economics, International Association of Agricultural Economists, vol. 38(3), pages 251-266, May.
    8. Yongmin Chen & Xinyu Hua, 2017. "Competition, Product Safety, and Product Liability," Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 237-267.
    9. Stefano Castriota & Marco Delmastro, 2010. "Individual and Collective Reputation: Lessons from the Wine Market," L'industria, Società editrice il Mulino, issue 1, pages 149-172.
    10. Lu, Yang K., 2013. "Optimal policy with credibility concerns," Journal of Economic Theory, Elsevier, vol. 148(5), pages 2007-2032.
    11. Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, vol. 49(10), pages 1407-1424, October.
    12. Damien S Eldridge, 2007. "A Shirking Theory of Referrals," Working Papers 2007.05, School of Economics, La Trobe University.
    13. repec:eee:proeco:v:191:y:2017:i:c:p:178-193 is not listed on IDEAS
    14. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363.
    15. Alan D. Morrison & William J. Wilhelm Jr, 2004. "Partnership Firms, Reputation, and Human Capital," American Economic Review, American Economic Association, vol. 94(5), pages 1682-1692, December.
    16. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978, April.
    17. Ichiro Obara, 2004. "Firm Reputation and Horizontal Integration (with H. Cai)," UCLA Economics Online Papers 318, UCLA Department of Economics.
    18. Chen, Liyun, 2009. "What do we pay for asymmetric information? The evolution of mechanisms in online markets," MPRA Paper 22506, University Library of Munich, Germany.
    19. Antonelli, Cristiano, 2017. "From the Economics of Information to the Economics of Knowledge," Department of Economics and Statistics Cognetti de Martiis LEI & BRICK - Laboratory of Economics of Innovation "Franco Momigliano", Bureau of Research in Innovation, Complexity and Knowledge, Collegio 201706, University of Turin.
    20. Mooweon Rhee, 2009. "Does Reputation Contribute to Reducing Organizational Errors? A Learning Approach," Journal of Management Studies, Wiley Blackwell, vol. 46(4), pages 676-703, June.
    21. Daniel Sutter, 2005. "State Regulations and E-Commerce: The Case for Internet Casket Sales in Oklahoma," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 20(Spring 20), pages 27-42.
    22. Sascha Raithel & Manfred Schwaiger, 2015. "The effects of corporate reputation perceptions of the general public on shareholder value," Strategic Management Journal, Wiley Blackwell, vol. 36(6), pages 945-956, June.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:644-663. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael P. Albert). General contact details of provider: http://edirc.repec.org/data/aeaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.