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Imperfect Product Testing and Market Size

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  • Mason, Charles F
  • Sterbenz, Frederic P

Abstract

The authors consider an imperfect test of product quality and ask how it interacts with adverse selection to affect market size. Although one might expect adverse selection to be mitigated, there are scenarios where it is exacerbated. Also, two counterintuitive comparative static results emerge. First, a small increase in the test cost can increase the equilibrium expected profits earned by sellers of higher quality units and so expand the market. Second, the equilibrium expected profits earned by sellers with lower quality units can be increased by a small improvement in the accuracy of an imperfect test. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Mason, Charles F & Sterbenz, Frederic P, 1994. "Imperfect Product Testing and Market Size," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 61-86, February.
    • Handle: RePEc:ier:iecrev:v:35:y:1994:i:1:p:61-86
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    Citations

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    Cited by:

    1. Chalfant, James A. & James, Jennifer S. & Lavoie, Nathalie & Sexton, Richard J., 1999. "Asymmetric Grading Error And Adverse Selection: Lemons In The California Prune Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(1), pages 1-23, July.
    2. Miguel Carriquiry & Bruce A. Babcock, 2007. "Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 12-23.
    3. Stéphan Marette & John Crespi, 2003. "Can Quality Certification Lead to Stable Cartels?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(1), pages 43-64, August.
    4. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December.
    5. Charles Mason, 2011. "Eco-Labeling and Market Equilibria with Noisy Certification Tests," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(4), pages 537-560, April.
    6. Gu, Yiquan, 2008. "Imperfect Certification," Ruhr Economic Papers 78, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    7. Creane, Anthony & Jeitschko, Thomas D. & Sim, Kyoungbo, 2022. "Welfare effects of product certification under latent adverse selection," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    8. Dimitri, Carolyn & Lichtenberg, Erik, 2002. "Quality Inspection, Adverse Selection And Trade In Perishable Commodities," Working Papers 28579, University of Maryland, Department of Agricultural and Resource Economics.
    9. repec:zbw:rwirep:0078 is not listed on IDEAS
    10. Marette, S. & Crepsi, J.M., 1999. "Cartel Stability and Quality Signaling," Papers 99-29, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    11. Yokessa, Maïmouna & Marette, Stéphan, 2019. "A Review of Eco-labels and their Economic Impact," International Review of Environmental and Resource Economics, now publishers, vol. 13(1-2), pages 119-163, April.
    12. Crespi, John M. & Marette, Stephan, 2003. "Some Economic Implications Of Public Labeling," Journal of Food Distribution Research, Food Distribution Research Society, vol. 34(3), pages 1-12, November.
    13. Bottega, Lucie & De Freitas, Jenny, 2019. "Imperfect certification in a Bertrand duopoly," Economics Letters, Elsevier, vol. 178(C), pages 33-36.
    14. Dimitri, Carolyn & Lichtenberg, Erik, 2000. "Verification In Contracts With Random Changes In Quality," Working Papers 28565, University of Maryland, Department of Agricultural and Resource Economics.
    15. Laurent Linnemer & Anne Perrot, 2000. "Une analyse économique des "signes de qualité". Labels et certification des produits," Revue Économique, Programme National Persée, vol. 51(6), pages 1397-1418.
    16. Dorothée Brécard, 2017. "Consumer misperception of eco-labels, green market structure and welfare," Journal of Regulatory Economics, Springer, vol. 51(3), pages 340-364, June.
    17. Mason, Charles F., 2001. "Minimum wages and information," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 153-170.
    18. Mason, Charles F. & Gottesman, Aron A. & Prevost, Andrew K., 2003. "Shareholder intervention, managerial resistance, and corporate control: a Nash equilibrium approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 466-482.
    19. Nadar, Emre & Ertürk, Mine Su, 2021. "Eco-design of eco-labels with coarse grades," Omega, Elsevier, vol. 99(C).
    20. Yiquan Gu, 2008. "Imperfect Certification," Ruhr Economic Papers 0078, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    21. Chia‐Ying Liu & Chi‐Hsin Wu, 2009. "Environmental Consciousness, Reputation And Voluntary Environmental Investment," Australian Economic Papers, Wiley Blackwell, vol. 48(2), pages 124-137, June.

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