OBSERVABLE REPUTATION TRADING*

Authors

  • Hendrik Hakenes,

    1. Max Planck Institute for Research on Collective Goods, Bonn, Germany; International University in Germany, University of Mannheim, Germany
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  • Martin Peitz

    1. Max Planck Institute for Research on Collective Goods, Bonn, Germany; International University in Germany, University of Mannheim, Germany
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    • 1

      A previous version of this article had the title “Selling Reputation when Going out of Business.” We would like to thank audiences at the universities of Bologna, Bonn, Heidelberg, Mannheim, Rotterdam, Pompeu Fabra, the London School of Economics, the 2004 CESifo Area Conference in Industrial Organization in Munich, the EARIE 2004 in Berlin, the EEA 2004 in Madrid, Markus Reisinger, an anonymous referee, and especially Heski Bar-Isaac and Nicola Persico for helpful comments. Please address correspondence to: Hendrik Hakenes, MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany. Phone: 0049-228-9141625. Fax: 0049-228-9141621. E-mail: hakenes@coll.mpg.de.


  • *

    Manuscript received July 2005; revised January 2007.

Abstract

Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner's type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firms. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.

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