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The Groucho Effect of Uncertain Standards

Author

Listed:
  • Rick Harbaugh

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • John W. Maxwell

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Beatrice Roussillon

Abstract

Consumers are rarely sure of the exact standard that product labels and other certificates of quality represent. We show that any such uncertainty creates a “Groucho effect” in which seeing that a product has a label leads consumers to infer that the standard for the label itself is not very demanding. Label adoption is therefore always less likely to be an equilibrium than without uncertainty over the standard, and if it is an equilibrium it is always less informative than without such uncertainty. The Groucho effect leads to an information externality so better firms are reluctant to adopt labels if worse firms adopt them. Applying the model to eco-labels, we find that industry groups, governments, and NGOs can increase label adoption by publicizing labeling criteria, by encouraging consumers to expect label adoption when there are multiple equilibria, and by setting high standards that are less likely to be devalued by low quality firms.

Suggested Citation

  • Rick Harbaugh & John W. Maxwell & Beatrice Roussillon, 2006. "The Groucho Effect of Uncertain Standards," Working Papers 2006-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2006-09
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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2006-09-harbaugh-maxwell-roussillon.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Eco-labels; disclosure; certification; persuasion; standards;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General

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