Time consistency and reputation

August 4, 2009 at 1:38 pm 1 comment

Two recent posts make an interesting contrast in firm reputation. In the first, Bryan Caplan notes that German insurance companies were eager to honor claims by Jews whose property was destroyed in Kristallnacht, despite the efforts of the Nazis to get them to repudiate these claims. The insurance companies were more concerned with their reputation for honoring claims and not finding a pretext to weasel out than they were with avoiding paying the substantial damages.

In the second, Ed Felten explains why Amazon’s sackcloth and ashes routine after the Kindle 1984 fiasco simply isn’t credible. They claim that they will never again delete downloaded works but this is what game theorists call “cheap talk” given the time inconsistency problem. Given the power of the state and Amazon’s recent much-lamented cravenness, it’s just hard to believe that Amazon would refuse a court order for any of the myriad reasons that one might be issued. In some of these cases Amazon might figure a way to reconcile its promise to its customers and its damages to the plaintiff (for instance, it might pay the plaintiff royalties in an IP case) but there are other plausible circumstances where only outright censorship could resolve the aggrieved party (these are especially issues in foreign jurisdictions many of which have pro-plaintiff burdens of proof for libel and ban hate speech and blasphemy).

As such, Felten observes that the only way that Amazon could really earn the trust of its customers is to use Schelling’s power of constraint (or for you humanities-types, to lash itself to the mast like Odysseus) and make it technically impossible for the Kindle to remotely delete or disable content. However it is unlikely that they would constrain themselves in this way because the publishers who license Kindle content probably insist on a kill switch as a hedge against piracy. Indeed, this is exactly why (despite in many ways being an ideal customer for it) I will never buy a Kindle. However I still trust Amazon for print because it already is impossible for them to demand that I return a paper book that they have sold me, no matter what judges in countries where Amazon does substantial business but that lack the First Amendment have to say about it.

So in the long run reputation is a difficult issue for firms to maintain. One way is to count on such severitas as was shown by the German insurance men, but as Amazon has shown this is not certain. The other is, as Felten argues, to use technical or legal instruments to make it impossible to renege.

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1 Comment

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