How to Price Imperfect Certification
This paper analyzes markets in which consumers do not directly observe the quality of the products but form their expectations about the quality based on the outcome of voluntary imperfect certification. I analyze how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of required quality. I find that there are both separating (only high quality producers apply and obtain the certificate) and pooling (both high and low-quality producers apply and obtain) equilibria. I show that the pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees. Since the pooling equilibrium is not welfare optimal, excessive competition between certifiers, which lowers the certification fee, is not beneficial. This result complements Strausz (2005) who shows that high certification fees are required to prevent the corruption of the certifier.
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- Strausz, Roland, 2004.
"Honest Certification and the Threat of Capture,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
25, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Ira N. Gang & Gil S. Epstein, 2002. "The Political Economy Of Kosher Wars," Departmental Working Papers 200227, Rutgers University, Department of Economics.
- L. A. Franzoni, 1998. "Imperfect competition in certification markets," Working Papers 338, Dipartimento Scienze Economiche, Universita' di Bologna.
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