Vertical Integration for Quality Signaling
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In the presence of consumers’ incomplete information of firms’ ability to produce quality components, we analyze firms’ incentive to commit to a long-term relationship as a way to convince consumers about forming a high-type pair. In contrast to the result of no brand leverage obtained by Choi and Jeon (2007), our analysis demonstrates that a “brand-named” firm can restore its leverage by committing to a long-term relationship. To overcome the time inconsistency problem in a long-term contract, firms may utilize vertical integration with relation-specific investment. This signaling motivation for vertical integration is different from the explanations that currently exist.
Abstract
In the presence of consumers’ incomplete information of firms’ ability to produce quality components, we analyze firms’ incentive to commit to a long-term relationship as a way to convince consumers about forming a high-type pair. In contrast to the result of no brand leverage obtained by Choi and Jeon (2007), our analysis demonstrates that a “brand-named” firm can restore its leverage by committing to a long-term relationship. To overcome the time inconsistency problem in a long-term contract, firms may utilize vertical integration with relation-specific investment. This signaling motivation for vertical integration is different from the explanations that currently exist.
참고문헌 (11)
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