Quality Provision in the Presence of a Biased Intermediary

47 Pages Posted: 9 Oct 2014

See all articles by Alexandre de Corniere

Alexandre de Corniere

Toulouse School of Economics

Greg Taylor

University of Oxford - Oxford Internet Institute

Date Written: October 1, 2014

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.

Keywords: intermediary, quality, bias

JEL Classification: L1, L4, L86

Suggested Citation

de Corniere, Alexandre and Taylor, Greg, Quality Provision in the Presence of a Biased Intermediary (October 1, 2014). NET Institute Working Paper No. 14-06. Available at SSRN: https://ssrn.com/abstract=2506341 or http://dx.doi.org/10.2139/ssrn.2506341

Alexandre De Corniere

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Greg Taylor (Contact Author)

University of Oxford - Oxford Internet Institute ( email )

1 St. Giles
University of Oxford
Oxford OX1 3PG Oxfordshire, Oxfordshire OX1 3JS
United Kingdom

HOME PAGE: http://www.greg-taylor.co.uk

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