Minimum Quality Standard Regulation Under Imperfect Quality Observability

Journal of Regulatory Economics, Vol. 41: 269

This is a pre-print of an article published in Journal of Regulatory Economics. The final authenticated version is available online at: DOi: 10.1007/s11149-011-9165-0

22 Pages Posted: 28 Jan 2010 Last revised: 29 Nov 2018

See all articles by Min (Michelle) Chen

Min (Michelle) Chen

Florida International University (FIU)

Konstantinos Serfes

Drexel University

Date Written: September 15, 2011

Abstract

Minimum quality standards (MQS) constitute an important regulatory tool that can be used to raise product qualities, to benefit consumers and to increase market participation. One of the main assumptions in the existing literature is that firms must comply with standards. Nevertheless, in many industries, and in particular the service industry, quality observability and enforceability are not perfect. Some low quality firms do not comply with standards. What are the welfare implications of an MQS regulation in such an environment? We develop a price competition model of vertical differentiation that accounts for these empirical observations. Contrary to well-established results in the literature, MQS can increase quality disparity between firms and raise hedonic prices. Some consumers get hurt and market participation decreases.

Suggested Citation

Chen, Min (Michelle) and Serfes, Konstantinos, Minimum Quality Standard Regulation Under Imperfect Quality Observability (September 15, 2011). This is a pre-print of an article published in Journal of Regulatory Economics. The final authenticated version is available online at: DOi: 10.1007/s11149-011-9165-0. Available at SSRN: https://ssrn.com/abstract=1543351 or http://dx.doi.org/10.2139/ssrn.1543351

Min (Michelle) Chen

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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