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Competition, Reputation and Cheating

  • P. Vanin

Under repeated market interaction, reputation and competition may drive out of the market those firms that do not comply with their quality promises. One may thus presume that competitive pressure improves average market quality. This paper shows that the opposite may be true in an endogenous entry, repeated interaction, linear demand oligopoly model, in which introductory prices may be used as quality signals. Cheating firms may enter the market, fool even rational consumers, and exit the market when discovered, implying a failure of the basic reputation mechanism and an increasing time path of prices. Markets for closer substitutes tend to have a lower initial average quality and less trusting consumers, whereas the number of competitors has no clear relationship with average quality.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 683.

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Date of creation: Nov 2009
Date of revision:
Handle: RePEc:bol:bodewp:683
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  1. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  2. Huck, Steffen & Ruchala, Gabriele K. & Tyran, Jean-Robert, 2006. "Competition Fosters Trust," CEPR Discussion Papers 6009, C.E.P.R. Discussion Papers.
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  6. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Vanderbilt University Department of Economics Working Papers 0417, Vanderbilt University Department of Economics.
  7. P. Vanin, 2009. "Competition, Reputation and Compliance," Working Papers 682, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. 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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  12. Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 621-662, December.
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