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Honest certification and the threat of capture

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  • Strausz, Roland

Abstract

This paper studies problems of capture in certification markets. It derives conditions under which reputation enables certifiers to resist capture. Moreover, it identifies a general principle of reputation models that favors concentration. This explains certifiers as efficient market institutions that sell reputation as a service to other firms. The analysis yields the following insights: 1) A demand for external certification exists, despite being costly and susceptibility to capture. 2) Low discount factors require a price of certification that exceeds the static monopoly price. 3) Price competition tends to a monopolization of certification markets. 4) Honest certification exhibits economies of scale and constitutes a natural monopoly.
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Suggested Citation

  • Strausz, Roland, 2005. "Honest certification and the threat of capture," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 45-62, February.
  • Handle: RePEc:eee:indorg:v:23:y:2005:i:1-2:p:45-62
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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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