Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry



17

sloping reaction functions may arise only when the cross effects are strong compared with the
profitability of the industry.

Hence, the structure of the problem makes several types of interaction plausible. Free
riding would be represented by downward-sloping best-response functions. Following the
language of Bulow, Geanakoplos, and Klemperer , QASs are “strategic substitutes.” If one
firm invests heavily in a QAS, it will be a weak competitor in the second stage. It then may be
worthwhile for the other processor to free ride on the consumer trust obtained by the other
firm’s investments. Though mathematically possible, it is hard to rationalize a situation in
which a processor would choose stringent levels of assurance, believing that its rival will put a
lax system in place. If the processor’s rival invests little in quality, the firm will face a tough
Cournot competitor for the few periods the market is expected to last, which acts as a double
incentive to implement less stringent QASs.

A more plausible and intuitively appealing scenario is that of QASs being “strategic
complements.” That is, reaction functions have an upward slope. When a processor’s rival puts
a lax QAS in place, the firm will find little incentive to invest in quality assurance. As the
processor’s rival increases the stringency of the QAS, the firm will have two types of
incentives to raise its own investments. First, the market will last longer. Second, quantity
competition will be milder, which increases per period margins and makes more stringent
systems worthwhile.

Now when the capacity of consumers to perceive quality increases, the direction of the
response in the levels of assurance is ambiguous. Following Dixit, we totally differentiate the
system of first-order conditions to get



More intriguing information

1. Bidding for Envy-Freeness: A Procedural Approach to n-Player Fair Division Problems
2. Giant intra-abdominal hydatid cysts with multivisceral locations
3. Quelles politiques de développement durable au Mali et à Madagascar ?
4. The Context of Sense and Sensibility
5. 03-01 "Read My Lips: More New Tax Cuts - The Distributional Impacts of Repealing Dividend Taxation"
6. ESTIMATION OF EFFICIENT REGRESSION MODELS FOR APPLIED AGRICULTURAL ECONOMICS RESEARCH
7. Financial Markets and International Risk Sharing
8. THE UNCERTAIN FUTURE OF THE MEXICAN MARKET FOR U.S. COTTON: IMPACT OF THE ELIMINATION OF TEXTILE AND CLOTHING QUOTAS
9. The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey
10. BILL 187 - THE AGRICULTURAL EMPLOYEES PROTECTION ACT: A SPECIAL REPORT
11. I nnovative Surgical Technique in the Management of Vallecular Cyst
12. The name is absent
13. The name is absent
14. CAPACITAÇÃO GERENCIAL DE AGRICULTORES FAMILIARES: UMA PROPOSTA METODOLÓGICA DE EXTENSÃO RURAL
15. The name is absent
16. INTERPERSONAL RELATIONS AND GROUP PROCESSES
17. If our brains were simple, we would be too simple to understand them.
18. DISCRIMINATORY APPROACH TO AUDITORY STIMULI IN GUINEA FOWL (NUMIDA MELEAGRIS) AFTER HYPERSTRIATAL∕HIPPOCAMP- AL BRAIN DAMAGE
19. Should informal sector be subsidised?
20. EDUCATIONAL ACTIVITIES IN TENNESSEE ON WATER USE AND CONTROL - AGRICULTURAL PHASES