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On the use of labels in credence goods markets

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  • Bonroy, O.
  • Constantatos, C.

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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Bibliographic 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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Keywords: CREDENCE GOODS; INCOMPLETE INFORMATION; QUALITY; LABEL; DIFFERENTIATION;

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References

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  1. Winand Emons, 1995. "Credence Goods Monopolists," Diskussionsschriften dp9501, Universitaet Bern, Departement Volkswirtschaft.
  2. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
  3. Jean J. Gabszewicz & Isabel Grilo, 1992. "Price Competition When Consumersare Uncertain About Which Firm Sells Which Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 629-650, December.
  4. Kathleen Segerson, 1999. "Mandatory versus voluntary approaches to food safety," Agribusiness, John Wiley & Sons, Ltd., vol. 15(1), pages 53-70.
  5. Paolo Garella & Emmanuel Petrakis, 2005. "Minimum Quality Standards and Consumers Information," Working Papers 0510, University of Crete, Department of Economics.
  6. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  7. Brian Roe & Ian Sheldon, 2007. "Credence Good Labeling: The Efficiency and Distributional Implications of Several Policy Approaches," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 1020-1033.
  8. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  9. 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.
  10. 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, Agricultural and Applied Economics Association, vol. 86(1), pages 42-60.
  11. John M. Crespi & St)phan Marette, 2001. "How Should Food Safety Certification be Financed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 852-861.
  12. Segerson, Kathleen, 1998. "Mandatory vs. Voluntary Approaches to Food Safety," Research Reports 25188, University of Connecticut, Food Marketing Policy Center.
  13. Marette, Stephan & Bureau, Jean-Christophe & Gozlan, Estelle, 2000. "Product Safety Provision and Consumers' Information," Australian Economic Papers, Wiley Blackwell, vol. 39(4), pages 426-41, December.
  14. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
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Citations

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Cited by:
  1. 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.
  2. Kiesel, Kristin & Villas-Boas, Sofia Berto, 2010. "Can Information Costs Affect Consumer Choice?—Nutritional Labels in a Supermarket Experiment—," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116433, European Association of Agricultural Economists & Agricultural and Applied Economics Association.
  3. Bontemps, Christophe & Bouamra-Mechemache, Zohra & Simioni, Michel, 2012. "Quality Labels and Firm Survival in the French Cheese Industry," IDEI Working Papers 741, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. GABSZEWICZ, Jean J. & RESENDE, Joana, . "Differentiated credence goods and price competition," CORE Discussion Papers RP -2461, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. repec:ags:jrapmc:122316 is not listed on IDEAS
  6. Kiesel, Kristin, 2012. "“A Definition at Last, But What Does it All Mean?†Newspaper Coverage of Organic Food Production and its Effects on Milk Purchases," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(1), April.
  7. Bonroy, O. & Lemarié, S., 2010. "Downstream labeling and upstream price competition," Working Papers 201001, Grenoble Applied Economics Laboratory (GAEL).
  8. Christos Constantatos & Markus Herrmann, 2011. "Market Inertia and the Introduction of Green Products: Can Strategic Effects Justify the Porter Hypothesis?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 50(2), pages 267-284, October.
  9. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2011. "Certification of Corporate Social Responsibility Activities in Oligopolistic Markets," Working Papers 1103, University of Crete, Department of Economics.
  10. Kiesel, Kristin & Villas-Boas, Sofia B., 2009. "Can Information Costs Confuse Consumer Choice?---Nutritional Labels in a Supermarket Experiment," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6st6d0rr, Department of Agricultural & Resource Economics, UC Berkeley.
  11. Philippe Barla & Christos Constantatos & Markus Herrmann, 2008. "Environmental Regulation as a Coordination Device for the Introduction of a Green Product: The Porter’s Hypothesis Revisited," Discussion Paper Series 2008_04, Department of Economics, University of Macedonia, revised May 2008.
  12. Gaëlle Balineau & Ivan Dufeu, 2010. "Are Fair Trade Goods Credence Goods? A New Proposal, with French Illustrations," Journal of Business Ethics, Springer, vol. 92(2), pages 331-345, April.
  13. Bonroy, O. & Constantatos, C., 2013. "On the economics of labels : a review of the theoretical literature," Working Papers 2013-01, Grenoble Applied Economics Laboratory (GAEL).
  14. Stephan Marette, 2010. "Consumer confusion and multiple equilibria," Working Papers 37866, Institut National de la Recherche Agronomique, France.
  15. Stéphan Marette, 2010. "Consumer confusion and multiple equilibria," Economics Bulletin, AccessEcon, vol. 30(2), pages 1120-1128.

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