Reputation with Hidden Information

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Recent developments in the theory of the firm have been devoted mainly to investigating the consequences of asset ownership, and deal with well-defined tangible assets that can be bought and sold. It is well known, however, that many firms have intangible assets, one of the more important of which is the firm's name, or more precisely, the reputation that is conveyed by its name. Most of the reputation literature in economics theory focuses on analyzing the role played by reputation in situations where a firm can "cooperate" (e.g., collude with other firms in setting a price, or provide a high quality good to a consumer) or "deviate" (e.g., cut prices to capture market shares, or provide a low quality good at a low cost); the asset-like aspect of a firm's reputation was mostly ignored. What work had been done was unable to explain how, for instance, a firm's reputation might increase (or decrease) in value following performance, as is commonly observed in reality. Nor was there a role for observed behavior such as a firm changing its name, a common practice that has lately generated some attention. However, the researcher has developed a new model treating a firm's name as an intangible asset that has yielded some interesting results. The first result shows that firms will buy and sell names in all equilibria. The second result shows that the very best firms cannot "separate" themselves; that is, those who can easily maintain a reputation cannot outbid less successful firms in the market for names. The principle aim of the proposed research is to generalize and expand the previous work in an attempt to better understand the role of a firm's reputation both as an incentive device for firm behavior and as a "separating" device through the market for firm names. Applications of the new modeling approach are likely to be useful in understanding phenomena such as franchising and umbrella branding. It is also possible that this line of research may eventually shed some light on collective reputations and the formation of partnerships.