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We develop a model in which firms can
only gradually build a reputation for high quality. In our model, consumer
awareness about the firm and the quality of its product develop gradually
over time. Hence, the longer a firm has been (uninterruptedly) providing
high quality, the more valuable its reputation. We assume that firms must
continuously invest to attain and maintain good quality. A young firm,
whose reputation is not yet well established, has less of an incentive
to invest, hence is more likely to be low quality and hence is unable to
command high prices. This further reduces its incentive to invest in its
reputation. An older firm, whose reputation is better established and hence
more valuable, has more to lose from tarnishing it, therefore works harder
to maintain it, and therefore is able to command higher prices, a feature
which further reinforces its incentive to invest and further increases
the value of its reputation. |
