Quality and Reputation: Is Competition Beneficial to Consumers

In this paper we develop a model of product quality and rms reputation. If quality is not veri able and there is repeated interaction between rms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that rms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner s (2002) one. The result is genereated in equilibria which sustains minimum quality standard as the (equilibrium) outcome of a social norm. Moreover, we demonstrate that more concentrated industry structures deliver higher quality and social welfare. Hence, when quality is an issue, competition is not necessarily bene cial for consumers in our setup. We derive our results in the speci c context of after-sales service quality provided by insurance companies because we document, through an example, that providing high quality is particularly di¢ cult in such a market. Yet, we argue that our analysis is of general applicability.