Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent

Abstract

This paper gives an example of renting the reputation of another agent to signal quality. We show that in a “maximally” separating equilibrium, manufacturers of high quality products distribute through retailers with strong reputation (reputable retailers), while manufacturers of low quality products distribute through retailers with no reputation (discounters). In this way, even if high quality manufacturers have no reputation of their own to post as bond, they can signal quality by posting the reputation of the retailers. In equilibrium, reputable retailers never default on their reputation. We also show that it pays the retailers to invest in reputation, as reputable retailers earn profits bounded away from zero under endogenous sequential entry, while the discounters' profits are zero.