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Quality Provision in the Presence of a Biased Intermediary

Author

Listed:
  • Alexandre de Cornière

    () (Department of Economics and Nuffield College, University of Oxford, 1 New Road, Oxford OX1 1NF)

  • Greg Taylor

    () (Oxford Internet Institute, University of Oxford, 1 St Giles, Oxford OX1 3JS)

Abstract

In many industries, consumers rely on recommendations by an intermediary when choosing between competing products. In this paper, we look at how the existence of contracts between firms and intermediaries affects the quality of the advice received by consumers, and firms' incentives to invest in improving the quality of their products. We consider a model with one intermediary and two firms who decide how much to invest. Under a variety of contractual environments (vertical integration, ex post endorsement) we show that, even though the intermediary tends to endorse the best firm, contractual endorsement distorts firms' incentives to invest. Quality can then decrease or increase compared to an objective benchmark. We contrast our approach to a setup with fixed qualities and endogenous prices, under which contractual endorsement hurts consumers.

Suggested Citation

  • Alexandre de Cornière & Greg Taylor, 2014. "Quality Provision in the Presence of a Biased Intermediary," Working Papers 14-06, NET Institute.
  • Handle: RePEc:net:wpaper:1406
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    File URL: http://www.netinst.org/Taylor_14-06.pdf
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    References listed on IDEAS

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    Cited by:

    1. Michael Luca & Timothy Wu & Sebastian Couvidat & Daniel Frank & William Seltzer, 2015. "Does Google Content Degrade Google Search? Experimental Evidence," Harvard Business School Working Papers 16-035, Harvard Business School, revised Aug 2016.

    More about this item

    Keywords

    intermediary; quality; bias;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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