Reputation and Product Quality

Franklin Allen

RAND Journal of Economics, 1984, vol. 15, issue 3, 311-327

Abstract: This article considers the role of reputation in a competitive market where product quality is unobservable. It is shown, among other things, that there can exist equilibria where price is equal to average cost but greater than marginal cost. No. firm cuts its price because this would make it more profitable to produce low- rather than high-quality goods; consumers are aware of this and would not buy its products.

Date: 1984
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