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Reputation-Driven Industry Dynamics

  • Bernardita Vial
  • Felipe Zurita

This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past firm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that firms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active firms: firms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger firms, for inept firms, and for firms with worse reputations. Competent firms have stochastically larger reputations than inept firms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.

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File URL: http://www.economia.uc.cl/docs/dt_436.pdf
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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 436.

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Date of creation: 2013
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Handle: RePEc:ioe:doctra:436
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  5. Mailath,G.J. & Samuelson,L., 1998. "Who wants a good reputation?," Working papers 19, Wisconsin Madison - Social Systems.
  6. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
  7. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, vol. 109(1), pages 24-38, March.
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  17. repec:oup:restud:v:78:y:2011:i:4:p:1400-1425 is not listed on IDEAS
  18. Mehmet Ekmekci, 2010. "Sustainable Reputations with Rating Systems," Discussion Papers 1505, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 231-251.
  20. Vial Bernardita, 2010. "Walrasian Equilibrium and Reputation under Imperfect Public Monitoring," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-44, May.
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  24. Atkeson, Andrew & Hellwig, Christian & Ordoñez, Guillermo, 2014. "Optimal Regulation in the Presence of Reputation Concerns," CEPR Discussion Papers 10080, C.E.P.R. Discussion Papers.
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