Reputation-Driven Industry Dynamics

Bernardita Vial and Felipe Zurita

No 436, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past firm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that firms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active firms: firms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger firms, for inept firms, and for firms with worse reputations. Competent firms have stochastically larger reputations than inept firms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.

Keywords: reputation; industry dynamics; free entry; exit and entry rates (search for similar items in EconPapers)
JEL-codes: C7 D8 L1 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:436

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