Selling Reputation When Going out of Business
Is the reputation of a firm tradeable when the previous owner has to retire even though ownership change is observable? We consider a competitive market in which a share of owners must retire in each period. New owners, observing only recent profits, bid for the firms that are for sale. Customers are concerned with the owners' type, which reflects the quality of the good or service provided. When a customer observes an ownership change, he may have an incentive to switch to a different firm, even if his past experience was good. However, we show that, in equilibrium, customers believe that the new owner is also good. Hence reputation is tradeable, although ownership change is observable. In our model, reputation is an intangible asset, embodied in an attractive customer base. Firms with good owners sell at a premium.
|Date of creation:||26 Nov 2004|
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