OBSERVABLE REPUTATION TRADING

Hendrik Hakenes and Martin Peitz

International Economic Review, 2007, vol. 48, issue 2, 693-730

Abstract: Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner's type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firms. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2007
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