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Alliances between competitors and consumer information

Author

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  • Paolo Garella

    () (University of Milano, Italy)

  • Martin Peitz

    () (International University in Germany, Bruchsal (Germany))

Abstract

Alliances between competitors in which established firms provide access to proprietary resources, e.g. 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, as 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.

Suggested Citation

  • Paolo Garella & Martin Peitz, "undated". "Alliances between competitors and consumer information," Working Papers 0613, University of Crete, Department of Economics, revised 01 2006.
  • Handle: RePEc:crt:wpaper:0613
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    File URL: http://economics.soc.uoc.gr/wpa/docs/garellapeitz_stratall_crete.pdf
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    References listed on IDEAS

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    1. 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.
    2. Bernard Garrette & Pierre Dussauge & W. Mitchell, 2004. "Asymmetric performance: the market share impact of scale and link alliances in the global auto industry," Post-Print hal-00458748, HAL.
    3. 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.
    4. 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.
    5. Pashigian, B Peter & Gould, Eric D, 1998. "Internalizing Externalities: The Pricing of Space in Shopping Malls," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 115-142, April.
    6. Paolo G. Garella & Martin Peitz, 2000. "Intermediation Can Replace Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 1-24, March.
    7. Gary Biglaiser & James W. Friedman, 1999. "Adverse Selection with Competitive Inspection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 1-32, March.
    8. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
    9. Carlin, Barbara A. & Dowling, Michael J. & Roering, William D. & Wyman, John & Kalinoglou, John & Clyburn, Greg, 1994. "Sleeping with the enemy: Doing business with a competitor," Business Horizons, Elsevier, vol. 37(5), pages 9-15.
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    Cited by:

    1. 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.
    2. 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.

    More about this item

    Keywords

    alliances; brand sharing; asymmetric information; signaling; exclusion; moral hazard; entry assistan;

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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