A labeling policy imperfectly testing for quality is analyzed in a Bertrand duopoly.
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A separating equilibrium could be sustained with a free test.
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Welfare-motivated certifiers adopt low-cost tests with low rates of false negatives.
Abstract
A label that imperfectly signals product quality is analyzed in a Bertrand duopoly with differentiated products. Considering strategic firms when certification is imperfect has some important implications. A separating equilibrium can be sustained with a free test due to price strategic complementarity. When the certifier’s objective is welfare, and the test cost is sufficiently small, the most appropriate test is that which is subject to a low rate of false negatives.
