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Promoting a Reputation for Quality

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  • Daniel Hauser

    (Department of Economics, Aalto University)

Abstract

I consider a model in which a firm invests in both product quality and in a costly signaling technology, and the firm's reputation is the market's belief that its quality is high. The firm influences the rate at which consumers receive information about quality: the firm can either promote, which increases the arrival rate of signals when quality is high, or censor, which decreases the arrival rate of signals when quality is low. I study how the firm's incentives to build quality and signal depend on its reputation and current quality. The firm's ability to promote or censor plays a key role in the structure of equilibria. Promotion and investment in quality are complements: the firm has stronger incentives to build quality when the promotion level is high. Costly promotion can, however, reduce the firm's incentive to build quality; this effect persists even as the cost of building quality approaches zero. Censorship and investment in quality are substitutes. The ability to censor can destroy a firm's incentives to invest in quality, because it can reduce information about poor quality products.

Suggested Citation

  • Daniel Hauser, 2016. "Promoting a Reputation for Quality," PIER Working Paper Archive 16-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 29 Sep 2016.
    • Handle: RePEc:pen:papers:16-014
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    References listed on IDEAS

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    Cited by:

    1. Ivan Marinovic & Martin Szydlowski, 2019. "Monitor Reputation and Transparency," 2019 Meeting Papers 125, Society for Economic Dynamics.

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    More about this item

    Keywords

    Reputation; Advertising; Promotion; Censorship; Dynamic Games;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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