American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Reputation and Competitive Selection
American Economic Journal: Microeconomics
(pp. 335–76)
Abstract
We demonstrate how selection in competitive markets can impede long-run reputational incentives. In our model, competent firms can exert costly effort to improve expected product quality, but inept firms cannot. With low entry barriers, we show competent firms cannot persistently exert effort, despite bounded memory. Such effort would cause consumers to select firms based on reputations for competence, eventually selecting a monopolist with an arbitrarily high reputation, which has no incentive for effort. More generally, reputation-based selection rules out long-run effort, which undermines the basis for such selection. Intermediate entry barriers provide stronger reputational incentives than low or high barriers.Citation
Deb, Joyee, and Jack Fanning. 2026. "Reputation and Competitive Selection." American Economic Journal: Microeconomics 18 (4): 335–76. DOI: 10.1257/mic.20240297Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D40 Market Structure, Pricing, and Design: General
- D82 Asymmetric and Private Information; Mechanism Design
- L15 Information and Product Quality; Standardization and Compatibility