A BEJTE Topics article.

Abstract

The paper develops a simple theory of segmentation and fee-setting in certification markets. The basis for the theory is that certifiers offer differentiated tests; for a given object it is more difficult to pass the test of certifier i than the test of certifier j. Given the test standards, certifiers compete for customers via their fee-setting. Segmentation occurs in equilibrium: sellers with low unobservable quality self-select to an easy test and sellers with high unobservable quality self-select to a hard test. Moreover, sellers choosing an easy test pay a lower (endogenous) certification fee than sellers choosing a hard test. These results are consistent with evidence from the market for auditors and other markets, not readily explained by existing theories.

Submitted: May 19, 2005 · Accepted: August 15, 2006 · Published: March 4, 2009

Recommended Citation

Hvide, Hans K. (2009) "Oligopolistic Certification," The B.E. Journal of Theoretical Economics: Vol. 9 : Iss. 1 (Topics), Article 5.
DOI: 10.2202/1935-1704.1230
Available at: http://www.bepress.com/bejte/vol9/iss1/art5