Alliances Between Competitors and Consumer Information

Download or read book Alliances Between Competitors and Consumer Information written by Paolo G. Garella and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Alliances between competitors where an established firm provides access to its marketing and distribution channels are an important real-world phenomenon. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A is providing an implicit certification about the rival's product: consumers can infer that firm B is a strong competitor (high quality), as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business strategies.