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

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Results and Discussion

In this section, we examine the solutions to the problems posed and study how changes in the
economic environment affect the equilibrium levels of stringency of the QAS implemented,
associated expected profits for firms, and utility for consumers. Specifically, we study how the
structure of the industry, nature of reputations, and ability of consumers to detect quality
deviations affect the equilibrium outcomes.

Figure 1 presents the best-response functions for the two duopoly scenarios. Under the specific
parameterization and if reputation is public, reaction curves slope upwards. Processors find
few incentives to invest in QASs when the market is not going to last long (i.e., when their
rivals invest little in quality) and when they expect to face a tough (low-cost) Cournot
competitor in the following periods. However, as previously discussed, processors find it
worthwhile to put more stringent systems in place if they anticipate their rivals will do the
same thing. For the market to last more than a few periods, and compensate the investments in
quality assurance, both players need to invest in high levels of 5 in this scenario.

When reputations are private goods, reaction curves have a negative slope. That is,
when reputations are private goods, as processors anticipate their rivals will put a lax system in
place, it is worthwhile to invest in a more stringent QAS. The driving force is that processors
find it beneficial to give up some of the duopoly profits while increasing the likelihood of

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