Rick Harbaugh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) John W. Maxwell (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) Beatrice Roussillon
Additional information is available for the following
registered author(s):
Consumers are rarely sure of the exact standard that product labels and other certificates of quality represent. We show that any such uncertainty creates a “Groucho effect” in which seeing that a product has a label leads consumers to infer that the standard for the label itself is not very demanding. Label adoption is therefore always less likely to be an equilibrium than without uncertainty over the standard, and if it is an equilibrium it is always less informative than without such uncertainty. The Groucho effect leads to an information externality so better firms are reluctant to adopt labels if worse firms adopt them. Applying the model to eco-labels, we find that industry groups, governments, and NGOs can increase label adoption by publicizing labeling criteria, by encouraging consumers to expect label adoption when there are multiple equilibria, and by setting high standards that are less likely to be devalued by low quality firms.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number
2006-09.
Find related papers by JEL classification: L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
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.: