Entrants’ Reputation and Industry Dynamics
Abstract: This paper introduces the analysis of entry-exit decisions in a market where reputation determines the price that firms may charge. It does so by developing a rational-expectations model of competition in a non-atomic market under heterogeneous reputations. A crucial distinction is made between a seller and its name. Names, that can be kept or discarded, are vehicles for information transmission. The analysis focuses on the class of name-switching reputational equilibria, in which a firm discards its name if and only if its reputation falls below the entrants’ reputation. The main technical result is the existence of a unique steady-state equilibrium within this class. This equilibrium generates a rich steady-state industry dynamics, largely on agreement with the findings in the empirical literature. In addition, the paper studies the determinants of the entrants’ reputation.
JEL Classification: C7, D8, L1
Keywords: reputation, industry dynamics, free entry, exit and entry rates
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Etiquetas: exit and entry rates, free entry, industry dynamics, reputation