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There are two competing sellers of an experience good, one offers high quality, one low. The low-quality seller can engage in deceptive advertising, potentially fooling a buyer into thinking the product is better than it is. Although deceptive advertising might seem to harm the buyer, we show that he could be better off when the low-quality seller can engage in deceptive advertising than not. We characterize the optimal deterrence rule that a regulatory agency seeking to punish deceptive practices should adopt. We show that greater protection against deceptive practices does not necessarily improve the buyer welfare.

This paper builds a model of strategic misleading advertising in duopolistic markets with horizontal product differentiation and advertising externality between firms. We investigate the effects of regulating misinformation on market competition, behaviour of firms, and social welfare. We show that the degree of advertising externality and the magnitude of advertising costs are crucial for determining the welfare effects of several regulations, including prohibiting misleading advertising, educating consumers, taxing production, and taxing misleading advertising. We extend the model by introducing heterogeneous consumers, heterogeneous production costs between firms, and the degree of advertising informativeness. Our results have important policy implications for the debate regarding regulation of advertising, especially direct‐to‐consumer advertising for prescription and over‐the‐counter drugs. Ce texte construit un modele de publicite mensongere strategique dans des marches duopolistiques ou il y a differentiation horizontale des produits et externalites de publicite entre firmes. On examine les effets d’une reglementation de la desinformation sur la concurrence dans le marche, sur le comportement des firmes et sur le bien‐etre social. On montre que le degre d’externalites de la publicite et la magnitude des couts de publicite sont des elements cruciaux pour determiner les effets de bien‐etre de plusieurs reglementations, y compris prohiber la publicite mensongere, eduquer les consommateurs, taxer la production, et taxer la publicite mensongere. On developpe le modele pour prendre en compte les consommateurs heterogenes, des couts de production heterogenes entre firmes, et le contenu informationnel de la publicite. Ces resultats ont des implications importantes pour la politique publique dans les debats concernant la reglementation de la publicite, en particulier la publicite directe au consommateur pour les medicaments avec et sans ordonnance.

Improved consumer information about horizontal aspects of products of similar quality leads to better consumer matching but also to higher prices, so consumer surplus can go up or down, while profits rise. With enough quality asymmetry, though, the higher-quality (and hence larger) firm's price falls with more information, so both effects benefit consumers. This occurs when comparative advertising is used against a large firm by a small one. Comparative advertising, as it imparts more information, therefore helps consumers. Although it also improves the profitability of the small firm, overall welfare goes down because of the large loss to the attacked firm.

We examine the informational effects of M&As by investigating whether bank mergers improve banks’ ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower’s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using ‘hard’ information more intensively.

Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner’s type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firm. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.

Local governments in Western Europe increasingly use city time-access regulations to improve social sustainability. These regulations significantly influence the distribution process of retail chain organizations. This paper studies the impact of governmental time-window pressure on retailers' logistical concepts and the consequential financial and environmental distribution performance. We determine which dimensions in the retailer's logistical concept determine its cost and emission sensitivity to increasing time-window pressure. Our research is based on a multiple case study of fourteen Dutch retail cases in different sectors and with different store formulas. The retailers provided all organizational, flow and cost data of their secondary distribution (between distribution center and stores). We use these data to calculate the impacts of different time-window pressure scenarios, including the current situation, using vehicle routing software. It appears that cost and emissions increases are moderate, when few cities are affected. However, as more cities are affected, costs and emissions increase considerably, particularly if time-window lengths become shorter. Time-windows harmonized between cities lead to fewer negative effects. We find various dimensions that contribute to reducing a retailer's sensitivity to time-window pressure. We formulate conclusions hypothesizing the links between time-window pressure, its effects, and the dimensions that determine these effects. © 2007 Elsevier B.V. All rights reserved.

This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper’s main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no ex-post effect on the outsider firm’s profitability, thereby eliminating the so called (static) ‘free-riding problem’. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers’ surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD., COMPETE. QREN, FEDER, FCT

We consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm’s investment. We focus on dynamic reputation equilibria, whereby consumers ‘discipline’ a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers’ tolerance level - the level of product quality below which consumers switch to the rival firm - and firms’ investment in quality. Given consumers’ tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, layoffs that our equilibria sustain.

A durable-goods monopolist may use quality degradation as a commitment not to lower price in the future. The introduction of damaged goods expedites low-valuation consumers’ future demands, and helps the firm to mitigate the Coasian time-consistency problem. In such a case, damaged goods are more likely to be observed relative to the static setting where only the price-discrimination aspect of quality degradation is in effect. However, it is more likely to reduce welfare by inducing low- valuation buyers to buy the low-quality good early rather than to wait and buy the high-quality good later. So, quality degradation of durable goods is more likely to occur but less promising to the society, relative to the case of non-durable goods where damaged goods are rarely observed but more likely to be Pareto-improving.

We investigate how different competitive regimes affect the ability to provide incentives based on noisy information systems. The set-up involves multiple producers and processors in the presence of moral hazard and adverse selection. Reduced competition may facilitate incentive provision by allowing more high-powered incentives. This may rationalize both vertical and horizontal integration as seen in many agricultural markets with uncertain quality grading. On the other hand, if trading terms are settled before the information is observed, a noisy information system may suffice to give proper incentives. This may rationalize the use of long-term conditional price contracts in the trading of many agricultural products. Copyright 2003, Oxford University Press.

1. INTRODUCTION When cultivating a new export market or attempting to expand its share of an existing market, an exporter is likely to find that it has been preceded by its reputation. Minus a readily identifiable brand name, quality reputation may solely reflect the country of origin. For example, when consumers are presented with a large amount of complex product information, they may use the country of origin as a heuristic in forming product impressions without considering other product attributes. (1) In this article I show that this heuristic decision-making process can affect a firm's quality decision and can therefore become self-fulfilling. Hence, any bias that consumers have may be well founded; however, it is only correct because firms respond rationally to it. Colombia's garment industry provides an interesting example of a self-fulfilling unfavorable quality reputation in international trade. As described by Morawetz (1981), a single Colombian garment firm took a contract (for 50,000 men's suits) that was beyond its capability. The poor-quality result so tarnished the American importer's name that other high-quality importers become wary of Colombian-sewn garments. With the payoff to high-quality production reduced, Colombian garment firms then concentrated on low-quality markets, and the newly found unfavorable reputation was justified. In the model constructed here, consumers see only a noisy signal of the product's quality at the time of purchase; therefore, their posterior beliefs are based on this noisy signal and the country-of-origin reputations. As will be made clear, higher-quality firms benefit more from an increase in their country's reputation, so that a better reputation generates an increase in the percentage of high-quality firms. In this way the reputation becomes self-fulfilling and ex ante identical countries can be correctly perceived as differing in their percentage of high-quality producers. I next introduce an economy with two sectors. One sector produces more complex goods, where high quality is not easily verified and is more essential to the product's performance. These may be technology-intensive products, or they may consist of the design and marketing of the goods produced in the other sector. In particular, high-quality production costs and the consumer's value for high-quality goods is greater in this sector. I show that this sector becomes more profitable as the country-of-origin reputation increases. Hence, if one country's equilibrium reputation is low and the other country's equilibrium reputation is high, then the pattern of specialization and international trade can be determined solely by "reputational comparative advantage." (2) Finally, I show that reputational comparative advantage can overshadow a small technological comparative disadvantage in determining the pattern of international trade. Given this pattern of trade and specialization, based on reputational comparative advantage, a high-reputation firm may expend resources to establish a multinational enterprise (MNE) in the low-reputation country. For example, many MNE products require the differing specializations of both the high-and low-reputation countries. Although differing in motivation, this result accords well with more traditional models of vertical MNE. (3) However, this impetus for MNE (as well as its more traditional counterparts) does not explain why the MNE would choose foreign direct investment (FDI) over a less costly licensing arrangement. (4) The quality uncertainty in this model, along with the difference in equilibrium reputations, allows us to address this question. In particular, appropriable reputational rents are generated by FDI when the high-reputation parent firm procures and internalizes production with a low-reputation host firm. This FDI "breaks" the low-reputation equilibrium of the host firm and generates reputational rents. …

This paper presents a signaling model where both price and advertising expenditures are used as signals of the initially unobservable quality of a newly introduced experience good. Consumers can be either "fastidious" or "indifferent". Fastidious individuals place a greater value on a high-quality product and a lesser value on the low-quality product than do indifferent individuals. It is shown that a sensible separating equilibrium exists where both firms set their full information prices. However, the high-quality firm cuts advertising expenditures below the full information level of the low-quality firm, even if the full information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond positively to advertising cuts and correctly identify the product quality. Hence, modest advertising may signal high quality.