How to Price Imperfect Certification

Jan Myslivecek

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: 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.

Keywords: Certification; Imperfect Testing; Competition; Adverse Selection (search for similar items in EconPapers)
JEL-codes: D43 D45 D82 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-com and nep-cta
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