Trademark sales, entry, and the value of reputation

Abstract

We develop an infinite-horizon, overlapping-generations model of reputation in which consumers base willingness to pay for agent services on past performance summarized by a trademark. We show that when trademarks can be sold, successful firms capture the full value of their reputations upon sale but receive smaller premia for good performance while active as service providers. With discounting, all agents are worse off with trademark trade. Taking entry cost into account, we show that trademark trade typically reduces entry. When entry costs are high, welfare is increased by prohibiting such trade. © 2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.