Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

Market competition creates strategic incentives for firms to communicate private information about their own product quality through certification. Although voluntary certification has recently gained importance in the agricultural industry, information asymmetry is not always completely addressed. This study analyzes how the relative proportion of boundedly rational consumers in the market influences the effectiveness of voluntary certification mechanisms by using a duopoly game model of high- and low-quality firms. The presented results show that a change in the proportion of boundedly rational consumers leads to different certification behaviors and a different market equilibrium. We also find that the existence of boundedly rational consumers is an important factor in the failure of voluntary certification. Indeed, when the relative proportion of such consumers is very high, voluntary certification is ineffective at improving market efficiency.