The Groucho Effect of Uncertain Standards

Rick Harbaugh (), John W. Maxwell () and Beatrice Roussillon

No 2006-09, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

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.

Keywords: Eco-labels; disclosure; certification; persuasion; standards (search for similar items in EconPapers)
JEL-codes: L15 L21 D82 Q00 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env, nep-mic and nep-reg
Date: Written 2006-11
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Persistent link: http://EconPapers.repec.org/RePEc:iuk:wpaper:2006-09

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