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Reputation and turnover

Author

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  • Rafael Rob
  • Tadashi Sekiguchi

Abstract

We 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, payoffs that our equilibria sustain.
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Suggested Citation

  • Rafael Rob & Tadashi Sekiguchi, 2006. "Reputation and turnover," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 341-361, June.
  • Handle: RePEc:bla:randje:v:37:y:2006:i:2:p:341-361
    DOI: j.1756-2171.2006.tb00019.x
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    File URL: http://hdl.handle.net/10.1111/j.1756-2171.2006.tb00019.x
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    References listed on IDEAS

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    1. repec:wsi:wschap:9789812818478_0012 is not listed on IDEAS
    2. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
    3. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    4. Drew Fudenberg & David Levine & Eric Maskin, 2008. "The Folk Theorem With Imperfect Public Information," World Scientific Book Chapters,in: A Long-Run Collaboration On Long-Run Games, chapter 12, pages 231-273 World Scientific Publishing Co. Pte. Ltd..
    5. Chalk, Andrew J, 1987. "Market Forces and Commercial Aircraft Safety," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 61-81, September.
    6. 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.
    7. Roy Radner & Roger Myerson & Eric Maskin, 1986. "An Example of a Repeated Partnership Game with Discounting and with Uniformly Inefficient Equilibria," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 59-69.
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    Citations

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    Cited by:

    1. Jeremy A. Sandford, 2010. "Experts and quacks," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 199-214.
    2. Du, Chuang, 2012. "Solving payoff sets of perfect public equilibria: an example," MPRA Paper 38622, University Library of Munich, Germany.
    3. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363.
    4. Alcalá, Francisco & González-Maestre, Miguel & Martínez-Pardina, Irene, 2014. "Information and quality with an increasing number of brands," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 109-117.

    More about this item

    JEL classification:

    • 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

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