QUALITY EXPECTATIONS, REPUTATION, AND PRICE

Although the theoretical literature on firm reputation is well develop ed, few empirical studies exist that quantify the importance of reputa tion effects. This paper estimates the impact on price of current prod uct quality and reputation using data from the market for Bordeaux win e. A model is proposed in which price is a function of current quality and expected quality, where the latter depends on reputation. Equatio ns determining price and expected quality are estimated jointly. The e mpirical findings show that the price premium associated with a better reputation far exceeds that associated with improvements in current q uality. The impact of reputation on price is disaggregated into indivi dual firm and collective (or group) reputation effects, and the signif icance and magnitude of these effects are compared. The results indica te that both types of reputation are important, and that in general, t he market values collective reputation indicators only to the extent t hat they are useful predictors of product quality.