Certification and minimum quality standards when some consumers are uninformed

Benno Buehler and Florian Schuett

European Economic Review, 2014, vol. 70, issue C, 493-511

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.

Keywords: Certification; Minimum quality standard; Unobservable quality; Policy intervention (search for similar items in EconPapers)
JEL-codes: D82 L13 L15 L51 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Working Paper: Certification and Minimum Quality Standards when Some Consumers are Uninformed (2012)
Working Paper: Certification and Minimum Quality Standards when Some Consumers are Uninformed (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:70:y:2014:i:c:p:493-511

DOI: 10.1016/j.euroecorev.2014.06.007

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