Certification and minimum quality standards when some consumers are uninformed

B. Buehler, F. Schütt

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)493-511
JournalEuropean Economic Review
Volume70
Early online date24 Jun 2014
DOIs
Publication statusPublished - Oct 2014

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Minimum quality standards
Certification
Quality choice
Profit
Industry
Fixed costs
Social welfare

Keywords

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

Cite this

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Certification and minimum quality standards when some consumers are uninformed. / Buehler, B.; Schütt, F.

In: European Economic Review, Vol. 70, 10.2014, p. 493-511.

Research output: Contribution to journalArticleScientificpeer-review

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