Promoting a Reputation for Quality

I consider a model in which a firm invests in both product quality and in a costly
signaling technology, and the firm's reputation is the market's belief that its quality
is high. The firm influences the rate at which consumers receive information about
quality: the firm can either promote, which increases the arrival rate of signals
when quality is high, or censor, which decreases the arrival rate of signals when
quality is low. I study how the firm's incentives to build quality and signal depend
on its reputation and current quality. The firm's ability to promote or censor plays
a key role in the structure of equilibria. Promotion and investment in quality are
complements: the firm has stronger incentives to build quality when the promotion
level is high. Costly promotion can, however, reduce the firm's incentive to build
quality; this effect persists even as the cost of building quality approaches zero.
Censorship and investment in quality are substitutes. The ability to censor can
destroy a firm's incentives to invest in quality, because it can reduce information
about poor quality products.

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Paper Number
16-014
Year
2016
Authored by