THE QUALITY OF CERTIFICATION AND ITS EFFECT ON MARKET OUTCOMES

Dmitry Shapiro (), Seung Huh () and Sung H. Ham ()

Working Paper Series from Institute of Economic Research, Seoul National University

Abstract: Across many marketing settings, sellers and buyers rely on the certification of quality to help foster the exchange of goods and services. However, quality certification is inaccurate and costly in many cases. We further investigate the relationship between quality certification and seller profits with an analytic model and an economic experiment. In particular, we assess whether certification enhances or detracts from seller profits and whether the results depend upon the cost and/or the noisiness of the certification. Our results demonstrate that quality certification can indeed benefit sellers, but only when the certification is sufficiently accurate.

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