Strategic Certification and Provision of Quality

Albano, Gian Luigi; Lizzeri, Alessandro

doi:10.1111/1468-2354.00110

Cited by 128 publications

(80 citation statements)

References 9 publications

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“…We, on the other hand, assume that our reviewers have no self-interested motives, apart from taking on biases to appeal to firms. Our work is also different from the literature on payment structures to certification intermediaries -see for example Lizzeri (1999) and Albano and Lizzeri (2001). The question there is how intermediaries affect the quality chosen by the firm, while in our model quality is fixed.…”

Section: Related Literaturementioning

confidence: 97%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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We consider the impact of pre-launch reviews on sales of products of quality unknown to consumers. Sales occur simultaneously after consideration by a reviewer with a known level of bias. Consumers observe the reviewer's decision and a private signal. Using convex analysis we prove three major results: (i) a monopolist, which can choose the type of reviewer and the price conditional on the chosen reviewer's decision, will always want to have its product reviewed; (ii) choosing an extreme reviewer, that is either the toughest or softest reviewer type available, is always optimal; and (iii) the switch from the toughest to softest reviewer occurs when the precision of private information reaches a calculable threshold. The paper provides a justification for the existence of heavily biased reviews and tests, and also suggests a clear course of action for firms in different situations. For example, an entrant with a very innovative product should risk a tough pre-launch test, while an incumbent with a new product that provides only a small change over an existing one would do best using a soft pre-launch review.

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Section: Related Literaturementioning

confidence: 97%

The optimal choice of pre-launch reviewer

Gill

Sgroi

2012

Journal of Economic Theory

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“…Following the standard modeling features used in quality differentiation models [e.g Shaked and Sutton (1982)] we assume the demand side consists of a continuum of consumers in each market with a varying taste parameter, θ, distributed uniformly over the interval [0,1]. Consumers derive utility from the first unit of purchase only, so that each consumer chooses to consume one unit of the good or makes no purchase.…”

Section: The Modelmentioning

confidence: 99%

Vertical product differentiation, minimum quality standards, and international trade

Petropoulou

2012

Oxford Economic Papers

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Regulatory standards that control the quality of vertically differentiated products are becoming increasingly important for industrial production and international trade. There is considerable debate surrounding the possible effects of standards on international trade and social welfare. This paper examines the implications of minimum quality standards (MQSs) in a free trade environment with two countries and two firms competing in prices in an industry characterised by vertical product differentiation. Mild minimum quality standards are shown to raise welfare by increasing the quality, lowering the (quality-adjusted) price of traded goods and increasing market coverage. Nevertheless, cross-country externalities result in governments choosing MQSs above or below the world optimum thereby reducing welfare by inducing exit and reducing competition. The model suggests that international organisations, such as the International Organization for Standardization (ISO), may be better positioned to improve welfare outcomes through the development of product standards.Keywords: International Trade, JEL Classification Numbers: * I would like to thank the ESRC for their financial support and Tony Venables, Alejandro Cunat, Steve Redding, Henry Overman, Gilles Duranton and Kwok Tong Soo for their invaluable comments. Moreover, I would also like to thank all seminar and conference participants at the London School of Economics, and elsewhere, for their feedback. All errors are mine.

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“…6 In some cases, noisy signals may exist regarding quality before purchase. Lizzeri (1999) and Albano and Lizzeri (2001), for example, discuss the incentives faced by third-party certification institutions. Even if such intermediaries had perfect access to product information, they can obtain rents by reporting noisy signals to consumers.…”

Section: Introductionmentioning

confidence: 99%

“…Our theoretical model builds on the adverse selection mechanism design literature, combining the costly state verification (CSV) model pioneered by Townsend (1979) with work on noisy signals (e.g., Burdett and Mortensen, 1981;Mason and Sterbenz, 1994;Lizzeri, 1999;Albano and Lizzeri, 2001) and inter-temporally correlated types. Our correlated types model is similar to that pioneered by Baron and Besanko (1984) in the two-period case (later generalized by Battaglini (2005) for infinite repetitions).…”

Section: Introductionmentioning

confidence: 99%

“…Lizzeri (1999) examines the role of a certifying intermediary that can perfectly observe quality, but send a noisy signal to consumers. Heinkel (1981) and Albano and Lizzeri (2001) examine the effect of a noisy signals on nonrepeated interactions in which quality is endogenous. Our model extends these results by examining the impact of an exogenous noisy signal in a dynamic setting that also allows for the simultaneous existence of a perfect testing device.…”

Section: Introductionmentioning

confidence: 99%

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