Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Groucho Effect of Uncertain Standards

Contents:

Author Info

  • 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

Abstract

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

If you experience problems downloading a file, check if you have the proper application to view it first. 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.
File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-09-harbaugh-maxwell-roussillon.pdf
Download Restriction: no

Bibliographic 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.

as in new window
Length:
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:iuk:wpaper:2006-09

Contact details of provider:
Postal: 1309 East Tenth Street, Room 451, Bloomington, IN 47405-1701
Phone: 812-855-9219
Fax: 812-855-3354
Email:
Web page: http://www.bus.indiana.edu/bepp/
More information through EDIRC

Related research

Keywords: Eco-labels; disclosure; certification; persuasion; standards;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  2. Rick Harbaugh & Theodore To, 2005. "False Modesty: When Disclosing Good News Looks Bad," Working Papers 2005-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-46, December.
  4. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-48, September.
  5. Hyun Song Shin, 2001. "Disclosures and Asset Returns," FMG Discussion Papers dp371, Financial Markets Group.
  6. Mattoo, Aaditya & Singh, Harsha V, 1994. "Eco-labelling: Policy Considerations," Kyklos, Wiley Blackwell, vol. 47(1), pages 53-65.
  7. Amacher, Gregory S. & Koskela, Erkki & Ollikainen, Markku, 2004. "Environmental quality competition and eco-labeling," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 284-306, March.
  8. Banks, Jeffrey S. & Sobel, Joel., 1985. "Equilibrium Selection in Signaling Games," Working Papers 565, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. W. Kip Viscusi, 1978. "A Note on "Lemons" Markets with Quality Certification," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 277-279, Spring.
  11. Jeffrey R. Blend & Eileen O. van Ravenswaay, 1999. "Measuring Consumer Demand for Ecolabeled Apples," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1072-1077.
  12. Lyon,Thomas P. & Maxwell,John W., 2004. "Corporate Environmentalism and Public Policy," Cambridge Books, Cambridge University Press, number 9780521603768, April.
  13. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  14. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
  15. Teisl, Mario F. & Roe, Brian & Hicks, Robert L., 2002. "Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling," Journal of Environmental Economics and Management, Elsevier, vol. 43(3), pages 339-359, May.
  16. Okuno-Fujiwara, Masahiro & Postlewaite, Andrew & Suzumura, Kotaro, 1990. "Strategic Information Revelation," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 25-47, January.
  17. Josh Lerner & Jean Tirole, 2004. "A Model of Forum Shopping, with Special Reference to Standard Setting Organizations," NBER Working Papers 10664, National Bureau of Economic Research, Inc.
  18. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect Of Information On Product Quality: Evidence From Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 409-451, May.
  19. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
  20. Michael J. Fishman & Kathleen M. Hagerty, 2003. "Mandatory Versus Voluntary Disclosure in Markets with Informed and Uninformed Customers," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 45-63, April.
  21. Sobel, Joel, 2001. "On the Dynamics of Standards," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 606-23, Winter.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Olivier Bos & Béatrice Roussillon & Paul Schweinzer, 2013. "Agreeing on Efficient Emissions Reduction," CESifo Working Paper Series 4345, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:iuk:wpaper:2006-09. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rick Harbaugh).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.