Reputation is another word for trade-name value or brand value, and it is only one of many aspects of bargaining power.
The bargaining power of the seller of a Rolex is stronger than the bargaining power of the seller of a junk watch because of the brand value but that is only one conponent of the seller’s bargaining power among many others.
The market is essentially a playing field where the seller’s total bargaining power battles that of the buyer. That conflict never guarantees that the highest quality or even the good quality product will win.
Second, there is zero support for your claim that fear of loss of reputation is just as strong a fact as fear of regulation. That’s just plain false. The opposite is true. Wells Fargo Bank is proof that fear of loss of reputation is a far, far weaker force that fear of gov’t regulation.
Lastly, selling mostly good products or mostly safe products or only selling bad products for a year or two or three is absolutely not good enough. It’s not good enough for food, medical products, aircraft and auto parts, consumer appliances, etc. etc. etc. A level of even 1% defective products in those and many other areas is totally unacceptable.
It is you who doesn’t understand the market.
For you it’s all theory. Nothing you’ve said matches how real business works in the real world.