【主题】Stochastic Quality Cycles
【摘要/Abstract】This paper studies a model of quality-building in which the quality of a firm is treated as capital stock that accumulates by past investments, depreciates when there is no investment, and has a persistent effect on future payoffs. The setting is a discrete-time discounted stochastic game between a long-run firm and a sequence of short-run buyers where the firm's quality is the state variable. If actions are taken frequently enough, there is a unique Markov perfect equilibrium. For low levels of quality, the firm randomizes between investing and not investing, and the buyers randomize between buying and not buying. The firm always has an incentive to build the quality even if the stock reaches the lowest level. For high levels of quality, there is full demand and the firm exploits the quality by not investing. Quality moves cyclically between these two stages. Under certain circumstances, there is an extra stage, a quality-absorbing stage. If the firm's quality is very low, the firm loses the incentive to invest and quality eventually declines to the lowest level which is an absorbing state. We also characterize the equilibrium if price is endogenously chosen by th firm, and find that the firm implements a premium pricing strategy at the early stage and a discount pricing strategy at the late stage.