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Certification and Minimum Quality Standards when Some Consumers are Uninformed
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Certification and Minimum Quality Standards when Some Consumers are Uninformed

Author

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  • Buehler, B.
  • Schuett, F.

    (Tilburg University, School of Economics and Management)

Abstract

We compare certification to a minimum quality standard (MQS) policy in a duopolistic industry where firms incur quality-dependent fixed costs and only a fraction of consumers observe the quality of the offered goods. Compared to the unregulated outcome, both profits and social welfare would increase if firms could commit to producing a higher quality. An MQS restricts the firms׳ quality choice and leads to less differentiated goods. This fuels competition and may therefore deter entry. A certification policy, which awards firms with a certificate if the quality of their products exceeds some threshold, does not restrict the firms׳ quality choice. In contrast to an MQS, certification may lead to more differentiated goods and higher profits. We find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small. In that case, certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry.
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Suggested Citation

  • Buehler, B. & Schuett, F., 2012. "Certification and Minimum Quality Standards when Some Consumers are Uninformed," Other publications TiSEM d181488a-ea27-42f7-a2e7-0, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:d181488a-ea27-42f7-a2e7-0aefee9f5bef
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Simona Grassi & Ching-to Albert Ma, 2016. "Information acquisition, referral, and organization," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 935-960, November.
    2. Larry G. Epstein & Hiroaki Kaido & Kyoungwon Seo, 2016. "Robust Confidence Regions for Incomplete Models," Econometrica, Econometric Society, vol. 84, pages 1799-1838, September.
    3. Alexandre de Cornière & Greg Taylor, 2019. "A model of biased intermediation," RAND Journal of Economics, RAND Corporation, vol. 50(4), pages 854-882, December.
    4. Prüfer, J.O., 2014. "Trusting Privacy in the Cloud," Other publications TiSEM a9a71c30-19c3-466a-9d22-1, Tilburg University, School of Economics and Management.
    5. Sungho Yun, 2021. "Regulating corruptible certifier behavior," Journal of Regulatory Economics, Springer, vol. 59(2), pages 109-135, April.
    6. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    7. Prüfer, Jens, 2018. "Trusting privacy in the cloud," Information Economics and Policy, Elsevier, vol. 45(C), pages 52-67.
    8. Dorothée Brécard & Mireille Chiroleu-Assouline, 2024. "Information campaigns and ecolabels by environmental NGOs: Effective strategies to eliminate environmentally harmful components?," PSE-Ecole d'économie de Paris (Postprint) hal-04592469, HAL.
    9. Pollrich, Martin & Wagner, Lilo, 2016. "Imprecise information disclosure and truthful certification," European Economic Review, Elsevier, vol. 89(C), pages 345-360.
    10. Marco J. W. Kotschedoff & Max J. Pachali, 2020. "Higher Minimum Quality Standards and Redistributive Effects on Consumer Welfare," Marketing Science, INFORMS, vol. 39(1), pages 253-280, January.
    11. Francisco Scott & Juan P. Sesmero, 2022. "Market and welfare effects of quality misperception in food labels," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1747-1769, October.
    12. Wipusanawan, Chayanin, 2023. "Standard-essential patents, innovation, and competition," Other publications TiSEM 292e319a-9e6a-4465-8f8f-7, Tilburg University, School of Economics and Management.
    13. Prüfer, J.O., 2014. "Trusting Privacy in the Cloud," Other publications TiSEM 556bdb81-1b26-4692-877c-1, Tilburg University, School of Economics and Management.
    14. Frederick Dongchuhl Oh & Junghum Park, 2019. "Potential competition and quality disclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(4), pages 614-630, November.
    15. Francisco Scott, 2023. "An Experimental Analysis of Quality Misperception in Food Labels," Research Working Paper RWP 23-11, Federal Reserve Bank of Kansas City.

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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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