Alliances between competitors and consumer information

Paolo Garella and Martin Peitz

No 613, Working Papers from University of Crete, Department of Economics

Abstract: Alliances between competitors in which established firms provide access to proprietary resources, e.g. their distribution channels, are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certifies the rival's product. Consumers infer that firm B is a competitor with high quality, as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices.

Keywords: alliances; brand sharing; asymmetric information; signaling; exclusion; moral hazard; entry assistan (search for similar items in EconPapers)
JEL-codes: L13 L15 L24 L42 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006
New Economics Papers: this item is included in nep-com, nep-cse, nep-mic and nep-mkt
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Forthcoming in Journal of the European Economic Association

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Related works:
Journal Article: Alliances between Competitors and Consumer Information (2007)
Working Paper: Alliances between competitors and consumer information (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:crt:wpaper:0613

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