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Competition, Reputation and Cheating

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  • P. Vanin

Abstract

Under repeated market interaction, reputation and competition may drive out of the market those firms that do not comply with their quality promises. One may thus presume that competitive pressure improves average market quality. This paper shows that the opposite may be true in an endogenous entry, repeated interaction, linear demand oligopoly model, in which introductory prices may be used as quality signals. Cheating firms may enter the market, fool even rational consumers, and exit the market when discovered, implying a failure of the basic reputation mechanism and an increasing time path of prices. Markets for closer substitutes tend to have a lower initial average quality and less trusting consumers, whereas the number of competitors has no clear relationship with average quality.

Suggested Citation

  • P. Vanin, 2009. "Competition, Reputation and Cheating," Working Papers 683, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:683
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    References listed on IDEAS

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    1. P. Vanin, 2009. "Competition, Reputation and Compliance," Working Papers 682, Dipartimento Scienze Economiche, Universita' di Bologna.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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