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Label Confusion: The Groucho Effect of Uncertain Standards

  • Rick Harbaugh

    ()

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • John W. Maxwell

    ()

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Beatrice Roussillon

    ()

    (Grenoble Applied Economic Laboratory, University of Grenoble, F-38000 Grenoble, France)

Labels certify that a product meets some standard for quality, but often consumers are unsure of the exact standard that the label represents. Focusing on the case of ecolabels for environmental quality, we show how even small amounts of uncertainty can create consumer confusion that reduces or eliminates the value to firms of adopting voluntary labels. First, consumers are most suspicious of a label when a product with a bad reputation has it, so labels are often unpersuasive at showing that a seemingly bad product is actually good. Second, label proliferation aggravates the effect of uncertainty, causing the informativeness of labels to decrease rather than increase. Third, uncertainty makes labeling and nonlabeling equilibria more likely to coexist as the number of labels increases, so consumers face greater strategic uncertainty over how to interpret the presence or absence of a label. Finally, a label can be legitimitized or spoiled for other products when a product with a good or bad reputation displays it, so firms may adopt labels strategically to manipulate such information spillovers, which further exacerbates label confusion. Managers can reduce label confusion by supporting mandatory labeling or by undertaking investments to make certain labels "focal." This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1412
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 9 (February)
Pages: 1512-1527

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:9:p:1512-1527
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  1. David Dranove & Ginger Zhe Jin, 2010. "Quality Disclosure and Certification: Theory and Practice," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 935-63, December.
  2. 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.
  3. Liang Guo, 2009. "Quality Disclosure Formats in a Distribution Channel," Management Science, INFORMS, vol. 55(9), pages 1513-1526, September.
  4. 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.
  5. 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.
  6. Avner Shared & John Sutton, 1981. "The Self-Regulating Profession," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 217-234.
  7. Estelle Gozlan & Bernard Sinclair-Desgagné, 2001. "A Theory of Environmental Risk Disclosure," CIRANO Working Papers 2001s-17, CIRANO.
  8. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
  9. Fischer, Carolyn & Sedjo, Roger & Jawahar, Puja & Aguilar , Francisco, 2005. "Forest Certification: Toward Common Standards?," Discussion Papers dp-05-10, Resources For the Future.
  10. Liang Guo & Ying Zhao, 2009. "Voluntary Quality Disclosure and Market Interaction," Marketing Science, INFORMS, vol. 28(3), pages 488-501, 05-06.
  11. Michael J. Fishman & Kathleen M. Hagerty, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 427-444.
  12. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
  13. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 409-451.
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