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Alliances between Competitors and Consumer Information

  • Paolo G. Garella
  • Martin Peitz

Alliances between competitors in which established firms provide access to proprietary resources-for example, their distribution channels-are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certifies the rival's product. Consumers infer that firm B is a competitor with high quality, because otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices. (JEL: L15, L13, L24, L42, M21, M31, D43) (c) 2007 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 4 (06)
Pages: 823-845

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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:4:p:823-845
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  1. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
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  8. Sean Nicholson, 2005. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1433-1464, July.
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