This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier's adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality with the supplier. The supplier may enter the market by initially renting the downstream firm's reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs—this constitutes a novel theory of downstream barriers to entry.
Bibliographical noteFunding Information:
We thank the Editor Yongmin Chen, two anonymous reviewers, Takanori Adachi, Tony Creane, Jota Ishikawa, Justin Johnson, Arijit Mukherjee, Michael Waldman, Michael Whinston, and participants in various conferences and seminars for helpful comments. Choi acknowledges financial support by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2016S1A5A2A01022389).Peitz gratefully acknowledges financial support by the Deutsche Forschungsgemeinschaft (DFG) through CRC TR 224 and project PE 813/2-2.
© 2018 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Industrial relations
- Aerospace Engineering
- Economics and Econometrics
- Economics, Econometrics and Finance (miscellaneous)
- Strategy and Management
- Industrial and Manufacturing Engineering