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Markets with untraceable goods of unknown quality: a market failure exacerbated by globalization

Author

Listed:
  • McQuade, Timothy
  • Salant, Stephen W.
  • Winfree, Jason

Abstract

In markets for many fruits, vegetables, and an increasing number of imported goods, consumers cannot discern the quality of a product prior to purchase and can never identify its producer. Producing high-quality, safe goods is costly for a firm and raises the collective reputation for quality shared with its rivals. Minimum quality standards improve welfare. If consumers observe the country of origin of a product, quality, profits, and welfare increase. Exports from countries with more exporting firms are of lower quality and sell for lower prices. If one country imposes a minimum quality standard on its exports while other countries do not, consumers benefit. As for sellers, the regulation raises the profits of firms in the country with regulation and lowers the profits of firms in countries without regulation.

Suggested Citation

  • McQuade, Timothy & Salant, Stephen W. & Winfree, Jason, 2009. "Markets with untraceable goods of unknown quality: a market failure exacerbated by globalization," MPRA Paper 21874, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21874
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    File URL: https://mpra.ub.uni-muenchen.de/21874/1/MPRA_paper_21874.pdf
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    References listed on IDEAS

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    1. Kotchen, Matthew J. & Salant, Stephen W., 2011. "A free lunch in the commons," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 245-253, May.
    2. Jean Tirole, 1996. "A Theory of Collective Reputations (with applications to the persistence of corruption and to firm quality)," Review of Economic Studies, Oxford University Press, vol. 63(1), pages 1-22.
    3. Raphaël Soubeyran & Elodie Rouvière, 2008. "Collective Reputation, Entry and Minimum Quality Standard," Working Papers 2008.7, Fondazione Eni Enrico Mattei.
    4. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    5. Pierre Fleckinger, 2007. "Collective Reputation and Market Structure: Regulating the Quality vs Quantity Trade-of," Working Papers hal-00243080, HAL.
    6. Olmstead, Alan L. & Rhode, Paul W., 2003. "Hog-Round Marketing, Seed Quality, and Government Policy: Institutional Change in U.S. Cotton Production, 1920 1960," The Journal of Economic History, Cambridge University Press, vol. 63(02), pages 447-488, June.
    7. Jason A. Winfree & Jill J. McCluskey, 2005. "Collective Reputation and Quality," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 206-213.
    8. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
    9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Cited by:

    1. Baniak Andrzej & Grajzl Peter, 2013. "Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects," Review of Law & Economics, De Gruyter, vol. 9(2), pages 265-302, October.

    More about this item

    Keywords

    globalization; quality; collective reputation; minimum quality standards;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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