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“Reputation and Turnover” by

By Rafael Rob and Tadashi SekiguchiRafael Rob and Tadashi Sekiguchi


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 firmbyswitchingtoitsrivalinthecasethat 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

Topics: useful comments. Remaining errors are, regrettably, our own
Year: 2004
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