Imperfect Competition in Certification Markets

Abstract

This paper offers a theoretical analysis of imperfect competition in certification markets. Firms that intend to engage in a regulated activity must produce third-party certification of compliance with prescribed regulations and standards. The certification service is provided by independent certifiers competing a la Cournot. We show that the interaction between certifiers and firms results in a market equilibrium that can be illuminated by the techniques of standard oligopoly theory. When certifiers' liability is not too low, the certification fee is determined by the degree of concentration of the certification market. Due to the peculiarity of this market, a lower concentration is not always socially desirable.

JEL Classification: L59, K29, M49