This thesis by Carl Shapiro, submitted to the Massachusetts Institute of Technology in 1980, explores the impact of imperfect information on market performance, particularly focusing on product quality and seller reputation. The central theme is that while reputation can significantly prevent quality deterioration, it is not perfect. The thesis analyzes two main scenarios: a monopoly seller in an imperfect information environment and a perfectly competitive market where reputations play a crucial role. In the first scenario, the thesis examines how a monopoly seller's quality choice is influenced by initial reputation and the speed of learning by consumers. It shows that any self-fulfilling quality level is lower than the perfect information quality level, and the slower the reputation adjustment, the lower the steady-state quality level. The thesis also discusses the pricing decisions of a monopolist facing initial misperceptions of product quality and the welfare implications of imperfect information. In the second scenario, the thesis studies how high-quality items sell at a premium in a perfectly competitive market, despite perfect competition. It argues that the quasi-rents earned by firms with good reputations provide a competitive rate of return to the reputation, leading to welfare losses due to the divergence between price and cost for high-quality items. The thesis also analyzes the effects of various consumer information remedies and the impact of minimum quality standards. Overall, the thesis provides a comprehensive analysis of how imperfect information affects market performance, emphasizing the role of reputation in maintaining quality and the welfare implications of these dynamics.This thesis by Carl Shapiro, submitted to the Massachusetts Institute of Technology in 1980, explores the impact of imperfect information on market performance, particularly focusing on product quality and seller reputation. The central theme is that while reputation can significantly prevent quality deterioration, it is not perfect. The thesis analyzes two main scenarios: a monopoly seller in an imperfect information environment and a perfectly competitive market where reputations play a crucial role. In the first scenario, the thesis examines how a monopoly seller's quality choice is influenced by initial reputation and the speed of learning by consumers. It shows that any self-fulfilling quality level is lower than the perfect information quality level, and the slower the reputation adjustment, the lower the steady-state quality level. The thesis also discusses the pricing decisions of a monopolist facing initial misperceptions of product quality and the welfare implications of imperfect information. In the second scenario, the thesis studies how high-quality items sell at a premium in a perfectly competitive market, despite perfect competition. It argues that the quasi-rents earned by firms with good reputations provide a competitive rate of return to the reputation, leading to welfare losses due to the divergence between price and cost for high-quality items. The thesis also analyzes the effects of various consumer information remedies and the impact of minimum quality standards. Overall, the thesis provides a comprehensive analysis of how imperfect information affects market performance, emphasizing the role of reputation in maintaining quality and the welfare implications of these dynamics.