Two-Sided Reputation in Certification Markets
46 Pages Posted: 20 Nov 2012 Last revised: 19 Dec 2016
Date Written: December 15, 2016
In a market where sellers solicit certification to overcome asymmetric information, we show that the profit of a monopolistic certifier can be hump-shaped in its reputation for accuracy: a higher accuracy attracts high-quality sellers but sometimes repels low-quality sellers. As a consequence, reputational concerns may induce the certifier to reduce information quality, thus depressing welfare. The entry of a second certifier impacts reputational incentives: when sellers only solicit one certifier, competition plays a disciplining role and the region where reputation is bad shrinks. Conversely, this region may expand when sellers hold multiple certifications.
Keywords: Certification, Reputation, Multihoming
JEL Classification: D82, D83
Suggested Citation: Suggested Citation