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

30

Footnotes

¹ There is a large body of literature showing that when certification is imperfect, some
producers of low quality will apply for and obtain certification. See De and Nabar, and Mason
and Sterbenz.

² Hennessy, and Chalfant et al. showed that imperfect testing and grading lead to under-
investment in quality-enhancing techniques by farmers. This is because producers of low
quality impose an externality on producers of high quality.

³ This assumption is consistent with a large body of work in the marketing and psychology
literature (see for example Oliver, Rust and Oliver, Kahneman and Tversky), where negative
events generate stronger and more rapid reactions than positive events.

⁴ Note that m(s,ω)=λ(s)+(1-λ(s))(1-ω) =(1-ω)+ωλ(s) is the convex combination between the
true probability of having a product of high quality and one. We see that as ω→ 0 , m(s,ω) → 1,

and the processors are expected to stay in state 1 for a large number of periods, even if they are
offering a product that does not meet the promised standards.

₅              ∂m ( s,ω)     ∂λ(s)

⁵ Recall that —=ω. = _ω —L2

∂s          ∂s

⁶ Note that in Darby and Karni’s paper, supplying firms knew the actual quality of the product

(repair services) they were offering.

⁷ To see this, recall that m ( s_i ) = 1 - ω + ωλ( si ), and lim —iɪ-iɪ
ω→0   ∂si

⁸ By increasing its first-period investments in QASs, a firm is raising its own costs for the
second-stage competition, which benefits its rivals. However, these benefits are lower if the
rivals also increase their costs.

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