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Quality and Reputation: Is Competition Beneficial to Consumers?

Author

Listed:
  • Alessandro Fedele

    () (Department of Economics, Università di Brescia)

  • Piero Tedeschi

    () (DISCE, Università Cattolica)

Abstract

In this paper we develop a model of product quality and firms' reputation. If quality is not verifiable and there is repeated interaction between firms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that competitive firms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner's (2002) one. Positive profit are generated in equilibria characterized by the emergence of a social norm which prescribes a minimum quality level. Moreover, we demonstrate that more concentrated industry structures deliver better quality and higher social and consumer welfare. This finding should induce cautiousness in enhancing competition when product quality is at stake. We derive our results in the specific context of after-sales service quality provided by insurance companies. Yet, we argue that our analysis is of general applicability.

Suggested Citation

  • Alessandro Fedele & Piero Tedeschi, 2010. "Quality and Reputation: Is Competition Beneficial to Consumers?," DISCE - Quaderni dell'Istituto di Economia dell'Impresa e del Lavoro ieil0061, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  • Handle: RePEc:ctc:serie4:ieil0061
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    File URL: http://www.unicatt.it/Istituti/EconomiaImpresaLavoro/Quaderni/IEIL0061.pdf
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Cappellari, Lorenzo, 2000. "The Covariance Structure of Italian Male Wages," Manchester School, University of Manchester, vol. 68(6), pages 659-684, December.
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    More about this item

    Keywords

    quality; reputation; Bertrand competition; insurance contracts.;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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