How To Price Imperfect Certification

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Executive Summary

This paper analyzes markets in which consumers do not directly observe the quality of the products but form their expectations about the quality based on the outcome of voluntary imperfect certification. The author analyzes how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of required quality. The author finds that there are both separating (only high quality producers apply and obtain the certificate) and pooling (both high and low-quality producers apply and obtain) equilibria. The author shows that the pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees.

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