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

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

Food manufacturers increasingly use quality assurance systems (QASs) to provide
information about product attributes to consumers and/or downstream processors. The types
of QASs include certification marks, traceability programs, third-party auditing programs,
and producer-signed affidavits. Firms use QASs to obtain a market advantage and to build
their reputation as a provider of products with claimed attributes. However, given the
inherent quality heterogeneity of agricultural output (Ligon), QASs can only increase the
probability that a product has a claimed attribute. We are interested here in providing insight
into how optimizing firms choose the optimal degree of “stringency” or assurance in their
QAS. We model stringency as the probability that a product has a claimed attribute.

Firms choose among QASs knowing that their competition also has the opportunity
to choose a QAS. Thus, the optimal choice of stringency will generally depend on the level
of stringency that competing firms choose so that firms compete in both output and
reputation. Klein and Leffler, and Shapiro have studied the role of reputation as a deception-
preventing device, examining a situation where quality is completely determined by a
producer’s investments. We build on these previous studies by linking firm reputation to the
choice of stringency in a QAS and modeling this choice as a function of the degree to which
consumers can discover whether the sought-after attribute is actually present; the potential
price premium paid for the attribute; the market structure in which firms compete; and the
nature of firm reputation.

Modeling Quality Assurance

We model a situation that is becoming pervasive in the food industry, whereby an input buyer
requires its suppliers to implement a QAS (Caswell, Bredahl, and Hooker; Reardon and

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