Reputation, Quality Choices and Optimal Product Discontinuation Policy

This paper studies quality choice and optimal product discontinuation decisions when a …rm's intended quality choice is di¢ cult to control and information about ac- tual quality is noisy. The market forms beliefs about the actual quality based on the observed sequence of noisy signals or product's reputation. It is shown that optimal product discontinuation policy exists. A …rm discontinues its product when reputation or realised quality falls below a threshold. Incentives for providing higher quality arise from two channels: higher quality increases (i) consumers'valuation for the product conditional on its being continued and (ii) the product's chance of surviving the policy. The …rm exerts higher quality and applies a more stringent reputation standard discon- tinuation policy when incentives from both channels are strengthened. This happens when either the …rm cares more about the long-term relationship or the precision of the initial prior belief decreases. Signal informativeness has ambiguous eects on the optimal discontinuation policy as its eects on consumers'valuation are unclear. How- ever, without discontinuation policy, higher informativeness unambiguously increases quality.