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You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets

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  • Peitz, Martin
  • Choi, Jay Pil

Abstract

This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream Â…firm. The supplierÂ’'s adverse-selection problem can be solved if the downstream fiÂ…rm has established a reputation for delivering high quality vis-Ã -vis the supplier. The supplier may enter the market by initially renting the downstream fiÂ…rmÂ’s reputation. The downstream fiÂ…rm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs.

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  • Peitz, Martin & Choi, Jay Pil, 2016. "You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets," CEPR Discussion Papers 11220, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11220
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    References listed on IDEAS

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    Cited by:

    1. Isadora Sánchez‐Torné & Juan Carlos Morán‐Álvarez & José A. Pérez‐López, 2020. "The importance of corporate social responsibility in achieving high corporate reputation," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 2692-2700, November.
    2. de Jong, Gerben & Behrens, Christiaan & van Herk, Hester & Verhoef, Erik, 2022. "Airfares with codeshares: (why) are consumers willing to pay more for products of foreign firms with a domestic partner?," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 1-18.

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    More about this item

    Keywords

    Adverse selection; Incumbency advantage; Experience goods; Outsourcing; Branding; Barriers to entry; Certification intermediaries;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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