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Markets with untraceable goods of unknown quality: a market failure exacerbated by globalization

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  • McQuade, Timothy
  • Salant, Stephen W.
  • Winfree, Jason

Abstract

In markets for many fruits, vegetables, and an increasing number of imported goods, consumers cannot discern the quality of a product prior to purchase and can never identify its producer. Producing high-quality, safe goods is costly for a firm and raises the collective reputation for quality shared with its rivals. Minimum quality standards improve welfare. If consumers observe the country of origin of a product, quality, profits, and welfare increase. Exports from countries with more exporting firms are of lower quality and sell for lower prices. If one country imposes a minimum quality standard on its exports while other countries do not, consumers benefit. As for sellers, the regulation raises the profits of firms in the country with regulation and lowers the profits of firms in countries without regulation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21874.

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Date of creation: 14 Dec 2009
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Handle: RePEc:pra:mprapa:21874

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Keywords: globalization; quality; collective reputation; minimum quality standards;

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  1. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  2. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  3. Tirole, J., 1993. "A Theory of Collective Reputations with Applications to the Persistence of Corruption and to Firm Quality," Working papers 93-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Alan L. Olmstead & Paul W. Rhode, 2003. "Hog Round Marketing, Seed Quality, and Government Policy: Institutional Change in U.S. Cotton Production, 1920-1960," NBER Working Papers 9612, National Bureau of Economic Research, Inc.
  5. Winfree, Jason A. & McCluskey, Jill J., 2003. "Collective Reputation And Quality," 2003 Annual meeting, July 27-30, Montreal, Canada 21927, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Kotchen, Matthew J. & Salant, Stephen W., 2011. "A free lunch in the commons," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 245-253, May.
  7. Pierre Fleckinger, 2007. "Collective Reputation and Market Structure: Regulating the Quality vs Quantity Trade-of," Working Papers hal-00243080, HAL.
  8. Raphaël Soubeyran & Elodie Rouvière, 2008. "Collective Reputation, Entry and Minimum Quality Standard," Working Papers 2008.7, Fondazione Eni Enrico Mattei.
  9. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
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Cited by:
  1. Baniak Andrzej & Grajzl Peter, 2013. "Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects," Review of Law & Economics, De Gruyter, vol. 9(2), pages 265-302, October.

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