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On the use of labels in credence goods markets

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Author Info
Bonroy, O.
Constantatos, C.

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Abstract

We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms? profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody?s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.

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Publisher Info
Paper provided by Grenoble Applied Economics Laboratory (GAEL) in its series Working Papers with number 200709.

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Date of creation: 2007
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Handle: RePEc:gbl:wpaper:200709

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Related research
Keywords: CREDENCE GOODS; INCOMPLETE INFORMATION; QUALITY; LABEL; DIFFERENTIATION;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer. [Downloadable!] (restricted)
  2. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
    Other versions:
  3. Crespi, John M & Marette, Stephan, 2001. " How Should Food Safety Certification Be Financed?," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 83(4), pages 852-61, November. [Downloadable!] (restricted)
  4. Gabszewicz, Jean J & Grilo, Isabel, 1992. "Price Competition When Consumers Are Uncertain about Which Firm Sells Which Quality," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 629-50, Winter.
  5. Crespi, John M. & Marette, Stephan, 2003. "Some Economic Implications Of Public Labeling," Journal of Food Distribution Research, Food Distribution Research Society, vol. 34(03), November. [Downloadable!]
  6. Paolo Garella & Emmanuel Petrakis, 2005. "Minimum Quality Standards and Consumers Information," Working Papers 0510, University of Crete, Department of Economics. [Downloadable!]
    Other versions:
  7. Brian Roe & Ian Sheldon, 2007. "Credence Good Labeling: The Efficiency and Distributional Implications of Several Policy Approaches," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 89(4), pages 1020-1033, November. [Downloadable!] (restricted)
  8. Marette, Stephan & Bureau, Jean-Christophe & Gozlan, Estelle, 2000. "Product Safety Provision and Consumers' Information," Australian Economic Papers, Blackwell Publishing, vol. 39(4), pages 426-41, December. [Downloadable!] (restricted)
  9. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn. [Downloadable!] (restricted)
  10. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March. [Downloadable!] (restricted)
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  11. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  12. Murray Fulton & Konstantinos Giannakas, 2004. "Inserting GM Products into the Food Chain: The Market and Welfare Effects of Different Labeling and Regulatory Regimes," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 86(1), pages 42-60, 02. [Downloadable!] (restricted)
  13. Segerson, Kathleen, 1998. "Mandatory vs. Voluntary Approaches to Food Safety," Research Reports 25188, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
  14. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kristin Kiesel & Sofia Villas-Boas, 2008. "Another Nutritional Label--Experimenting with Grocery Store Shelf Labels and Consumer Choice--," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1060, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
  2. Bonroy, O. & Lemarie, S., 2008. "Downstream labeling and upstream competition," Working Papers 200804, Grenoble Applied Economics Laboratory (GAEL). [Downloadable!]
  3. Evangelos Mitrokostas & Emmanuel Petrakis, 2008. "Private CSR Activities in Oligopolistic Markets: Is there any room for Regulation?," Working Papers 0816, University of Crete, Department of Economics. [Downloadable!]
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