Seminar: certification and minimum quality standards when some consumers are uninformed

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Florian Schuett (UvT)

Discussant: Bas Straathof (CPB)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject
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.

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