Quality and reputation: The effects of external and internal factors over time

Abstract

We model a firm's decisions about quality investment under differing external and internal environments. We find that costs and benefits of expending resources on quality depend on competitors’ price and quality, the persistence of reputation in the marketplace, the relative efficacy of quality improvement efforts and the persistence of these efforts over time. Our qualitative results suggest that under certain conditions, there are synergies between quality and quantity produced, as well as different types of quality efforts. A large computational study demonstrates the effect of market conditions and internal factors on the firm's choice of quality efforts and its profitability.