You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets

Martin Peitz and Jay Choi

No 11220, CEPR Discussion Papers from Centre for Economic Policy Research

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 Â…firm. The supplierÂ’'s adverse-selection problem can be solved if the downstream fiÂ…rm has established a reputation for delivering high quality vis-Ã -vis the supplier. The supplier may enter the market by initially renting the downstream fiÂ…rmÂ’s reputation. The downstream fiÂ…rm 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 costs.

Keywords: Adverse selection; Incumbency advantage; Experience goods; Outsourcing; Branding; Barriers to entry; Certification intermediaries (search for similar items in EconPapers)
JEL-codes: D4 L12 L4 L43 L51 L52 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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Related works:
Journal Article: You are judged by the company you keep: Reputation leverage in vertically related markets (2018)
Working Paper: You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets (2018)
Working Paper: You are judged by the company you keep: reputation leverage in vertically related markets (2016)
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