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On the use of labels in credence goods markets

  • Olivier Bonroy

    ()

  • Christos Constantatos

    ()

We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms? profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody?s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.

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File URL: http://hdl.handle.net/10.1007/s11149-008-9058-z
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Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 33 (2008)
Issue (Month): 3 (June)
Pages: 237-252

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Handle: RePEc:kap:regeco:v:33:y:2008:i:3:p:237-252
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  1. Winand Emons, 1995. "Credence Goods Monopolists," Diskussionsschriften dp9501, Universitaet Bern, Departement Volkswirtschaft.
  2. Brian Roe & Ian Sheldon, 2007. "Credence Good Labeling: The Efficiency and Distributional Implications of Several Policy Approaches," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 1020-1033.
  3. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  4. Marette, Stephan & Bureau, Jean-Christophe & Gozlan, Estelle, 2000. "Product Safety Provision and Consumers' Information," Australian Economic Papers, Wiley Blackwell, vol. 39(4), pages 426-41, December.
  5. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
  6. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  7. GABSZEWICZ, Jean J. & GRILO, Isabel, . "Price competition when consumers are uncertain about which firm sells which quality," CORE Discussion Papers RP -1055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Paolo Garella & Emmanuel Petrakis, 2008. "Minimum quality standards and consumers’ information," Economic Theory, Springer, vol. 36(2), pages 283-302, August.
  9. Segerson, Kathleen, 1998. "Mandatory vs. Voluntary Approaches to Food Safety," Research Reports 25188, University of Connecticut, Food Marketing Policy Center.
  10. Crespi, John M. & Marette, Stephan, 2003. "Some Economic Implications Of Public Labeling," Journal of Food Distribution Research, Food Distribution Research Society, vol. 34(03), November.
  11. Murray Fulton & Konstantinos Giannakas, 2004. "Inserting GM Products into the Food Chain: The Market and Welfare Effects of Different Labeling and Regulatory Regimes," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 42-60.
  12. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  13. John M. Crespi & St)phan Marette, 2001. "How Should Food Safety Certification be Financed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 852-861.
  14. Kathleen Segerson, 1999. "Mandatory versus voluntary approaches to food safety," Agribusiness, John Wiley & Sons, Ltd., vol. 15(1), pages 53-70.
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