Consumer Information, Product Quality, and Seller Reputation

Abstract

This thesis is concerned with the performance of markets in which buyers are unable to observe the quality of the products they buy prior to purchase.In such environments there is a temptation for sellers to reduce the quality of their items.An important force in such markets which gives firms an incentive to maintain quality is the formation of firm-specific reputations.The recurring theme of this thesis is that while reputation can significantly prevent quality deterioration, it cannot work perfectly.Since a seller can always cheat on his customers (cut quality) without detection, at least for a little while, the incentives to maintain quality are not as strong as they are under perfect information.The first essay analyzes a monopoly seller in this imperfect information environment.Viewing reputation as consumers' expectations of quality, it is shown that any self-fulfilling quality level is less than the perfect information quality level.Likewise, in a model where reputation adjusts towards previous quality, any steady state quality level is lower than the perfect information quality level.Furthermore, the slower is reputation adjustment, the lower is the steady-state quality level.