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

27

parameterization. Figure 3 also suggests that firms have an incentive to privatize their
reputations. For example, many food retailers sell products labeled with their own brand as
high quality products (Noelke and Caswell). The drawback of this strategy is that when a
problem occurs, the firms are identified with these brands and are clear targets in the
marketplace (Hennessy, Roosen, and Jensen).

—■— Reputation is a private good

« Monopoly

—— Reputation is a public good

Figure 3. Equilibrium responses of expected profits to changes in quality observability
(a=50, b=1, β=0.9)

It is not possible to state which situation yields higher welfare in general. Processors
would prefer, as expected, to be the only market participants and for reputations to be private
rather than public goods. It is also clear from Figure 4 that consumers prefer the scenario of a
duopoly with private reputations to that of a monopoly with collective reputations. However,
consumers’ choice between monopoly and duopoly with public reputations depends on the
level of quality observability, and the relevant discount factor. ¹⁵ In short, we can only say that
the duopoly situation with collective reputations is Pareto dominated by the other duopoly
scenario considered.¹⁶ This discussion provides support for some of the policies proposed by
Hennessy, Roosen, and Jensen to overcome some causes of systemic risk in the food industry.
The authors advocate for strategies such as improving traceability, testing, mandated labeling,

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