Certification and Minimum Quality Standards when Some Consumers are Uninformed

B. Buehler, F. Schuett

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Abstract

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 observes 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.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages32
Volume2012-040
Publication statusPublished - 2012

Publication series

NameTILEC Discussion Paper
Volume2012-040

Keywords

  • Certification
  • minimum quality standard
  • unobservable quality
  • policy intervention

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