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Intermediation Can Replace Certification

  • Paolo G. Garella
  • Martin Peitz

We consider a market in which consumers do not have perfect information about product quality. Producers can perfectly reveal that a good is of high quality through certification, which entails socially wasteful costs. Firms can choose whether to sell through an intermediary or to sell independently (vertical integration). We show that multibrand retailing, which leads to a redistribution of profits but not to social costs, can fully or partially replace certification by signaling product quality. Renting the image of a competing high-quality brand is shown to be an outcome that can be sustained through intermediation. Copyright (c) 2000 Massachusetts Institute of Technology.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 9 (2000)
Issue (Month): 1 (03)
Pages: 1-24

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Handle: RePEc:bla:jemstr:v:9:y:2000:i:1:p:1-24
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  1. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
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  8. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
  9. Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
  10. 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.
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  13. Marvel, Howard P, 1982. "Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 1-25, April.
  14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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  18. Katz, Michael L., 1989. "Vertical contractual relations," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 11, pages 655-721 Elsevier.
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