FEEM working papers "Note di lavoro" series
2013 .053

Investments in Quality, Collective Reputation and Information Acquisition


Authors: Fulvio Fontini, Katrin Millock, Michele Moretto
Series: Economy and Society
Editor: Giuseppe Sammarco
Keywords: Collective Reputation, Option Value, Quality
JEL n.: C73, D92, L15, Q52

Abstract

In many cases consumers cannot observe firms’ investment in quality or safety, but have only beliefs on the average quality of the industry. In addition, the outcome of the collective investment game of the firms may be stochastic since firms cannot control perfectly the technology or external factors that may affect production. In such situations, when only consumers’ subjective perceptions of the industry level of quality matter, the regulator may make information available to firms or subsidize their information acquisition. Under what conditions is it desirable to make information available? We show how firms’ overall level of investment in quality depends upon the parameters of the quality accumulation process, the cost of investment and the number of firms in the industry. We also show the potentially negative effects on the total level of quality from providing information on consumers’ actual valuation.

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