Certification and Minimum Quality Standards When Some Consumers are Uninformed

32 Pages Posted: 23 Nov 2012

See all articles by Benno Buehler

Benno Buehler

Toulouse School of Economics (IDEI) ; Department of Economics - Ludwig Maximilian University Munich

Florian Schuett

Tilburg Law and Economics Center (TILEC); Tilburg University - Tilburg University School of Economics and Management

Date Written: November 21, 2012

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.

Keywords: certification, minimum quality standard, unobservable quality, policy intervention

JEL Classification: L15, L13, L51, D82

Suggested Citation

Buehler, Benno and Schuett, Florian, Certification and Minimum Quality Standards When Some Consumers are Uninformed (November 21, 2012). TILEC Discussion Paper No. 2012-040, Available at SSRN: https://ssrn.com/abstract=2179028 or http://dx.doi.org/10.2139/ssrn.2179028

Benno Buehler (Contact Author)

Toulouse School of Economics (IDEI) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Department of Economics - Ludwig Maximilian University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Florian Schuett

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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