Reputation and Turnover

28 Pages Posted: 6 Aug 2004

See all articles by Rafael Rob

Rafael Rob

University of Pennsylvania - Department of Economics

Tadashi Sekiguchi

Kyoto University - Institute of Economic Research; Kobe University

Date Written: August 4, 2004

Abstract

We consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm's investment. We focus on dynamic reputation equilibria, whereby consumers "discipline" a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers' tolerance level - the level of product quality below which consumers switch to the rival firm - and firms' investment in quality. Given consumers' tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, payoffs that our equilibria sustain.

Keywords: Reputation, consumer switching, moral hazard, repeated games

JEL Classification: C73, D82, L14, L15

Suggested Citation

Rob, Rafael and Sekiguchi, Tadashi, Reputation and Turnover (August 4, 2004). Available at SSRN: https://ssrn.com/abstract=573421 or http://dx.doi.org/10.2139/ssrn.573421

Rafael Rob (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

Tadashi Sekiguchi

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

Kobe University ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

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