How to Price Imperfect Certification
AbstractThis paper analyzes markets in which consumers do not directly observe the quality of the products but form their expectations about the quality based on the outcome of voluntary imperfect certification. I analyze how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of required quality. I find that there are both separating (only high quality producers apply and obtain the certificate) and pooling (both high and low-quality producers apply and obtain) equilibria. I show that the pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees. Since the pooling equilibrium is not welfare optimal, excessive competition between certifiers, which lowers the certification fee, is not beneficial. This result complements Strausz (2005) who shows that high certification fees are required to prevent the corruption of the certifier.
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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp364.
Date of creation: Sep 2008
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Certification; Imperfect Testing; Competition; Adverse Selection;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-COM-2008-12-14 (Industrial Competition)
- NEP-CTA-2008-12-14 (Contract Theory & Applications)
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- Ira N. Gang & Gil S. Epstein, 2002. "The Political Economy Of Kosher Wars," Departmental Working Papers 200227, Rutgers University, Department of Economics.
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