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.
Original language | English |
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Pages (from-to) | 20-35 |
Number of pages | 16 |
Journal | B.E. Journal of Theoretical Economics |
Volume | 9 |
Issue number | 1 |
DOIs | |
Publication status | Published - Mar 2009 |