La piña en el Ecuador

In our model, a FI bears a reputation cost if i) it lies to a customer and ii) it profits from its lie because this lie leads the customer to purchase from him. Since other definitions of reputation costs are possible, in this subsection we check whether the model is robust to a more general specification of reputation costs. In order to do this we focus on the case where FI A is the price leader and FI B is the firm which has invested in information provision. This is the main case in our model as we have stated in Proposition 6. Previously, we saw that the ex-ante disadvantage of FI B forced it into information revelation, which forms the basis of our main results.

We allow for two reputation costs. One reputation cost, γ, is incurred when the FI lies and misleads the customer into purchasing the wrong prod- uct. This occurs when FI B tells a B-customer that he is type A and the customer purchases A (a case that entails no reputation cost in our model) and when it tells an A-customer that she is type B and the customer pur- chases B (a case that we cover in our model). The other reputation cost, η, is incurred when the FI lies but doesn’t mislead the customer. This occurs when FI B tells a B-customer that he is type A and the customer purchases B and when it tells an A-customer that she is type B and the customer purchases A. We assume γ > η. This is represented in Figure 3.

For this subsection, we abandon assumption A2. As we will see, there is a non-trivial partially revealing equilibria which would be eliminated with assumption A2 (and leave no equilibria for a range of possible prices).

1. We begin by analyzing the signaling game for FI B. For brevity, when customers use pure strategies we only describe the equilibrium, as its derivation is quite similar to our previous analyses.

• Hence, for pB ≤ pA −∆, FI B fully reveals and all customers purchase B.

0, R-pA 0- , R-pA - pB 0 - , r-pA 0, r-pA , R -pB , R -pB knows type is A 1-q knows type is B says A says A says B says B A A A A B B B B η q B p_B-γ , r- p_B pB,r γ p_B p_B-η

Figure 3: The signaling game with general reputation costs

• WhenpB ≥pA+ ∆, FI B fully reveals and all customers purchase

A.

• WhenpA−∆≤pB ≤pA+ ∆and pB ≤γ, FI B fully reveals and customers follow the advice.

• When pA−∆ ≤ pB ≤ pA−(2q−1)∆ and pB ≥ γ, FI B always saysBˆ, and customers purchase B.

• When pA−(2q−1)∆ ≤ pB ≤ pA−∆and pB ≥ γ there is one partially revealing equilibrium, where FI B is indifferent between saying Aˆ and Bˆ to an A customer, but always says Bˆ to a B customer. Customer’s who hear Bˆ then are indifferent between purchasing A or B. Let y equal the probability with which FI B saysBˆ to an A customer. The customer who hearsBˆ updates her probability of being type B to equal ₁₋1_q−₊q_yq. She is then indifferent when pB = pA+ (2(₁₋1_q−₊q_yq)−1)∆ (since y ∈ [0,1], pB ∈ [pA− (2q−1)∆, pA+ ∆]). Customer’s who hear Aˆ know they are type

A, and sincepB ≥pA−∆, they purchase A. In order to make FI B indifferent, the customer at Bˆ then choosesB with probability

η

γ). Profits from partially revealing are(1−q)(_η+pη

B−γ)pB. Profits are decreasing in pB (using the assumption γ > η), meaning that FI B has the incentive to set its price at the bottom of the interval. 2. Competition between FI A and FI B can also be analyzed in a similar

way as before.

• First, we show that pA is below γ + ∆. If it were above, there would be four possible information regimes: fully revealing where all customers purchase B (pB ≤pA−∆), non-revealing inBˆwhere all purchase B (pA−∆≤pB≤pA−(2q−1)∆), partially revealing (pA−(2q−1)∆ ≤ pB ≤ pA+ ∆), and fully revealing where all buy A ( pB ≥ pA+ ∆). FI B will never set the price so high that everyone purchases A, so we can focus on the first three intervals. The only interval where FI A makes positive profits is the partially revealing one - hence we will show that FI B can make larger profits by not pricing in that interval. We will show this in a proof by contradiction.

Suppose the profits from the partially revealing interval are larger than those of the non-revealing interval. If FI B sets its price in the non-revealing interval, it will choose the highest element,

pA−(2q−1)∆. Likewise, in the partially revealing interval, the price that maximizes profits ispA−(2q−1)∆. The hypothesis to be contradicted is then:

πnon−revealing < πpartially−revealing or pB−qγ <(1−q)( η

η+pB−γ)pB where pB =pA−(2q−1)∆.

SincepB > γ, substitutingγ for pB on the left hand side gives us (1−q)γ <(1−q)(_η+pη

B−γ)pB

Re-arranging this expression yields pB < γ, which is a contradic- tion and proves our result.

• Next, we show thatpA won’t be in the interval (γ−(2q−1)∆, γ+ ∆]. The information revelation regimes for this interval are the same as

above with the exception that the intervalpA−∆≤pB ≤pA−(2q−1)∆ is broken into two parts now: there is full revelation with customers following advice when pA−∆ ≤ pB ≤ γ, and the same non-revealing regime as above when γ ≤ pB ≤ pA−(2q−1)∆. Once again, FI B won’t set its price so high that everyone purchases A, nor will it set its price in the partially revealing region since the above proof holds here as well. Lastly, it is easy to see that the non-revealing region yields higher profits for B than the region where FI B fully reveals and customers follow advice (sincepB−qγ >(1−q)γ), meaning that FI A would get zero profits.

• Finally we look for the equilibrium such thatpA ≤γ−(2q−1)∆. Now there are four information revelation regimes: fully revealing where all customers purchase B (pB ≤pA−∆), fully revealing where customers follow advice (pA−∆≤pB ≤γ), partially revealing (γ ≤pB≤pA+∆), and fully revealing where all buy A ( pB ≥ pA+ ∆). The maximum profits of FI B for both the fully revealing regime where customers follow advice and for the partially revealing regime comes whenpB =γ and is equal to(1−q)γ (for both). The maximum profits of FI B in the fully revealing all-purchase-B regime is pA−∆. Therefore the optimal price for FI A is

pA= min[γ−(2q−1)∆,(1−q)γ+∆], where the second element prevents FI B from pricing low and giving FI A zero profits.

The profits take the same form as our model with more restrictive repu- tation costs, namely πA = qpA andπB = (1−q)γ −f. There are however, multiple equilibria which give us this same result - one fully revealing and many partially revealing. The many partially revealing come from the cor- ner solution that customers who hear Bˆ always choose B. Since FI B gets zero when the customer is type A, FI B is indifferent about what it says to type A, meaning that any probability y of sayingBˆ must only make the customer strictly prefer product B. Using weak dominance (as we did in the text, see footnote 6) gets rid of all partially revealing equilibria (FI B weakly prefers saying Aˆ to type A when pB = γ), leaving us with essentially the same equilibrium as in our less general reputation cost model.