Thursday, February 7, 2019
Jay Pil Choi; Martin Peitz suggest You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets.
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 firm. The supplierâ€™s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality with the supplier. The supplier may enter the market by initially renting the downstream firmâ€™s reputation. The downstream firm 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 costsâ€“this constitutes a novel theory of downstream barriers to entry.