Certification and Minimum Quality Standards When Some Consumers are Uninformed

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.

Potential competition and quality disclosure

“…11 Moreover, even when the quality space is continuous itself, limited disclosure technology may create a discrete quality choice. For example, suppose that a certification agency exists and awards a certificate if and only if the firm's quality is above a certain threshold (Buehler & Schuett, 2014). In this case, only two quality levels dominate all possible qualities (i.e., the threshold for a certificate and the minimum level).…”

“…Prior studies indicate that the differences in the marginal production costs according to the product quality leads to a separating equilibrium in which price has a positive association with quality (Bagwell & Riordan, 1991;Daughety & Reinganum, 2008). However, our model abstracts from this issue with the assumption that variable production costs do not depend on quality, as in many prior studies in the literature (Board, 2009;Buehler & Schuett, 2014;Hotz & Xiao, 2013). Indeed, price signaling could be credible only when variable costs depend on quality, thereby causing the difference in the price-setting incentive between the highand low-quality product incumbents.…”

Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

“…Chen et al [16] find that the more BR consumers there are, the higher the prices of low-quality firms will be. Buehler and Schuett [17] compare certification to a minimum quality standard policy in a duopoly where firms incur quality-dependent fixed costs and only a proportion of consumers observe the actual quality of the offered goods. Compared with the unregulated outcome, both profits and social welfare would increase if firms could commit to producing higher-quality products.…”

“…However, research in this field is still in its infancy. Similar to Buehler and Schuett [17], we also consider that consumers have different information about quality. However, to the best of our knowledge, the present study is the first to examine the relationship between BR consumers and firms' certification behaviors in order to explain, in depth, the causes behind the failure of voluntary certification.…”

Equilibrium selection in sequential games with imperfect information

“…This criterion may seem plausible when it is applicable, which is only seldom. 5 Risk dominance, extended by Harsanyi (15) and Selten (32) selects the equilibrium that is least risky in the sense that each player minimizes the potential losses if she cannot anticipate which equilibrium will be played by other agents. Risk dominance is de…ned for normal form games and while it has performed well in laboratory experiments on coordination games (Cabrales, Garc¬a-Fontes, Motta (6); Schmidt, Shupp, Walker and Ostrom (29)), it is not obvious how to apply the intuition underlying this concept to games with imperfect information in a compelling manner.…”