Dissertations

Dissertation Committee:
Andreas Ortmann (chair)
Junghun Cho
Peter Katuščák
Avner Shaked

Abstract:

This dissertation studies two quality assurance mechanisms know from markets with unobservable quality characteristics—certification and self-regulation. Certification is a mechanism based on a third party who tests producers and issues, for a fee, a certificate to those who meet the required quality standard. Self-regulation is a mechanism, where producers, rather than relying on a certifier, form a club, set standards, and monitor each other. In the first chapter, I compare certification and self-regulation. I show that if the testing technology is perfect and costless, the choice of standards and fees by the certifying organization (CO) is welfare inferior, while the self-regulatory organization (SRO) chooses a welfare optimal fee, and I identify conditions under which the SRO also chooses optimal standards. If the testing technology is costly and imperfect, this result is not necessarily valid and depends on the difference between the costs of the testing technology available to the CO and SRO. In the second chapter, Tomáš Konečný and I study an example of certification system - Fair Trade scheme. One of the arguments against the Fair Trade scheme is that the guaranteed minimum price tends to depress world prices and thus the incomes of non-participating farmers (e.g. The Economist, 2006). We develop a model that distinguishes between the impact of the introduction of a Fair Trade market per se and the effect of minimum price policies given that a Fair Trade market actually exists. The model suggests that the introduction of a Fair Trade market reduces information asymmetries between the trading parties and dampens the market power of middlemen. Improved matching and lower margins of the middlemen have the capacity to increase the incomes of both participating and non-participating farmers. The minimum FT contracting price, however, reduces farmers' payoffs relative to the free-contracting alternative. The minimum price also paradoxically increases the profits of the middlemen whose local monopsony power the Fair Trade scheme originally aimed to retrench. Furthermore, the total surplus generated by Fair Trade cooperatives declines. In the third chapter, I study markets in which consumers form their expectations about the quality based on the outcome of voluntary imperfect certification. I analyze how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of the required quality. I find that there are both separating (only high quality producers apply for the certificate) and pooling (both high and low-quality producers apply) equilibria. Pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees. Since the pooling equilibrium is not welfare optimal, low certification fee is not always beneficial. This result complements Strausz (2005) who shows that high certification fees are required to prevent corruption of the certifier.

Full Text: “Essays on Quality Assurance Mechanisms” by Jan Mysliveček