Free-Entry Equilibrium in a Market for Certifiers

Economics

Speaker:Finance Hans Hvide, Department of Finance, Norwegian School of Economics and Business
Date: Wednesday 10 October 2001
Time: 16:30
Location: Room SC 107

Further details

(with Aviad Heifetz)

The role of certifiers is to test products for quality, and to communicate the test results to the market. We construct a free-entry model of certification, where each certifier chooses a test standard and a price for certification. In equilibrium, certifiers differentiate their test standards, and attract different segments of the market. The price for having certified a high-quality product is higher than the price for having certified a low-quality product, and the net gain from being certified increases in product quality. We test and find support for these predictions in the market for MBA education, and also discuss how to apply the model to questions of regulation and minimum quality standards.