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Competition and Reputation

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Abstract

We study the interaction of competition and reputation as e¢- ciency enhancing mechanisms in environments where informational or lack of commitment constraints a¤ect the ability of …rms to compete for market shares. We …rst analyze a dynamic model of monopolistic competition with experience goods. If beliefs satisfy a minimal regularity condition, there is a unique equilibrium with quality goods being produced and the price has a mark-up which is either the full information monopolistic mark-up or, if this is not sustainable (e.g., when goods are very close substitutes), the rate of time preference, that acts as a reputation constraint. A variation of the model allows us to analyze the private provision of currencies. We show that if suppliers of currency decide their actions sequentially, and beliefs satisfy the regularity condition, the equilibrium exhibits a zero in‡ation rate, so that the e¢cient outcome is not achieved.

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