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Julio N


Date added:

August 8, 2015








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9 / 2246


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Thus, firms must give up their quality premium, at least temporarily, as punishment. A firm’s integration decision is based on the extent to which integration attenuates this necessary cost of maintaining a good reputation. Horizontal integration leads to a larger market base for the merged firm, which leads to a more effective punishment and a better monitoring by eliminating idiosyncratic shocks in many markets...
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This negative effect becomes very severe when the size of the merged firm gets larger and there is non-idiosyncratic firm-specific noise in the signal. These effects give rise to a reputation-based theory of the optimal firm size. We show that the optimal firm size is smaller when (1) trades are more frequent and information is disseminated more rapidly; or (2) the deviation gain is smaller compared to the quality premium; or (3) customer information about firms’ quality choices is more precise...
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