By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.
We demonstrate how selection in competitive markets can impede longrun
reputational incentives. In our model, competent firms can exert
costly effort to improve expected product quality, but inept firms cannot.
With low entry barriers, we show competent firms cannot persistently exert
effort, despite bounded memory. Such effort would cause consumers
to select firms based on reputations for competence, eventually selecting
a monopolist with arbitrarily high reputation, which has no incentive for
effort. More generally, reputation-based selection rules out long-run effort,
which then undermines the basis for such selection. Intermediate
entry barriers provide stronger reputational incentives than low or high
barriers.
