Free-Entry Equilibrium in a Market for Certifiers
31 Pages Posted: 1 Jun 2001
Date Written: May 18, 2001
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, products of different quality are certified by different certifiers, the price for certifying a high-quality product is higher than the price for certifying a low-quality product, and the net gain from certification is increasing in the (non-observable) 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.
Keywords: Certification; Free-entry; MBA; Product differentiation; Schooling; Signaling
JEL Classification: C72, D43, D82, G24, G38, I20, J4, M49
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