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Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent

Author

Listed:
  • Wujin Chu

    (Seoul National University, Office of the President, Republic of Korea)

  • Woosik Chu

    (Seoul National University, Office of the President, Republic of Korea)

Abstract

This paper gives an example of renting the reputation of another agent to signal quality. We show that in a “maximally” separating equilibrium, manufacturers of high quality products distribute through retailers with strong reputation (reputable retailers), while manufacturers of low quality products distribute through retailers with no reputation (discounters). In this way, even if high quality manufacturers have no reputation of their own to post as bond, they can signal quality by posting the reputation of the retailers. In equilibrium, reputable retailers never default on their reputation. We also show that it pays the retailers to invest in reputation, as reputable retailers earn profits bounded away from zero under endogenous sequential entry, while the discounters' profits are zero.

Suggested Citation

  • Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
  • Handle: RePEc:inm:ormksc:v:13:y:1994:i:2:p:177-189
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    File URL: http://dx.doi.org/10.1287/mksc.13.2.177
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    Citations

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    Cited by:

    1. Ajay Kalra & Shibo Li, 2008. "Signaling Quality Through Specialization," Marketing Science, INFORMS, vol. 27(2), pages 168-184, 03-04.
    2. Martin Peitz & Paolo G. Garella, 1999. "- Exclusive Dealing Clauses Facilitate Entry," Working Papers. Serie AD 1999-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Choi, Jay Pil, 2003. "Bundling new products with old to signal quality, with application to the sequencing of new products," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1179-1200, October.
    4. Ajay Kalra & Mengze Shi & Kannan Srinivasan, 2003. "Salesforce Compensation Scheme and Consumer Inferences," Management Science, INFORMS, vol. 49(5), pages 655-672, May.
    5. Noriaki Matsushima & Shohei Yoshida, 2016. "The countervailing power hypothesis when dominant retailers function as sales promoters," ISER Discussion Paper 0981, Institute of Social and Economic Research, Osaka University.
    6. Cole, Anne & Harris, Jane, 2005. "Rising interest in credence qualities in agricultural products and the role for government," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137828, Australian Agricultural and Resource Economics Society.
    7. Animesh Animesh & Vandana Ramachandran & Siva Viswanathan, 2005. "Quality Uncertainty And Adverse Selection In Sponsored Search Markets," Working Papers 05-27, NET Institute, revised Oct 2005.
    8. Noriaki Matsushima & Shohei Yoshida, 2016. "The Countervailing Power Hypothesis when Dominant Retailers Function as Sales Promoters," ISER Discussion Paper 0981r, Institute of Social and Economic Research, Osaka University, revised Jul 2017.
    9. Abhishek & Koshy, Abraham, 2008. "Quality Perceptions of Private Label Brands: Conceptual Framework and Agenda for Research," IIMA Working Papers WP2008-02-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    10. repec:eee:joreco:v:33:y:2016:i:c:p:33-42 is not listed on IDEAS
    11. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    12. Matos Cámara Rafael Fabricio & San Martín Gutiérrez Sonia, 2012. "Análisis sobre la reputación de marca, las emociones y la confianza como formadoras de la satisfacción del turista," Contaduría y Administración, Accounting and Management, vol. 57(4), pages 253-286, octubre-d.
    13. Paolo G. Garella & Martin Peitz, 2007. "Alliances between Competitors and Consumer Information," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 823-845, June.
    14. Martin Peitz, 2000. "Exclusionary Practices and Entry Under Asymmetric Information," Econometric Society World Congress 2000 Contributed Papers 1197, Econometric Society.
    15. Clerides, Sofronis & Nearchou, Paris & Pashardes, Panos, 2008. "Intermediaries as quality assessors: Tour operators in the travel industry," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 372-392, January.
    16. repec:eee:jouret:v:90:y:2014:i:4:p:538-551 is not listed on IDEAS
    17. Choi, Jay Pil & Peitz, Martin, 2016. "You are judged by the company you keep : reputation leverage in vertically related markets," Working Papers 16-07, University of Mannheim, Department of Economics.
    18. Yanhong H. Jin & David Zilberman & Amir Heiman, 2008. "Choosing Brands: Fresh Produce versus Other Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 463-475.
    19. Michael A. Wiles & Shailendra P. Jain & Saurabh Mishra & Charles Lindsey, 2010. "Stock Market Response to Regulatory Reports of Deceptive Advertising: The Moderating Effect of Omission Bias and Firm Reputation," Marketing Science, INFORMS, vol. 29(5), pages 828-845, 09-10.
    20. Paolo G. Garella & Martin Peitz, 2000. "Intermediation Can Replace Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 1-24, March.
    21. Abraham Koshy & . Abhishek, 2010. "Quality Perceptions of Private Label Brands Conceptual Framework and Agenda for Research," Working Papers id:2756, eSocialSciences.
    22. Clerides, Sofronis & Nearchou, Paris & Pashardes, Panos, 2005. "Intermediaries as Bundlers, Traders and Quality Assessors: The Case of UK Tour Operators," CEPR Discussion Papers 5038, C.E.P.R. Discussion Papers.
    23. Sofronis Clerides & Paris Nearchou & Panos Pashardes, 2004. "Intermediaries as Quality Assessors in Markets with Asymmetric," University of Cyprus Working Papers in Economics 3-2004, University of Cyprus Department of Economics.
    24. Ajay Kalra & Surendra Rajiv & Kannan Srinivasan, 1998. "Response to Competitive Entry: A Rationale for Delayed Defensive Reaction," Marketing Science, INFORMS, vol. 17(4), pages 380-405.
    25. Carlyle Farrell & Gervan Fearon, 2005. "Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(3), pages 285-296, September.

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