Honest Certification and the Threat of Capture

Strausz, Roland (August 2004): Honest Certification and the Threat of Capture. SFB/TR 15 Discussion Paper No. 25

Abstract

This paper derives conditions under which reputation enables certifiers to resist capture. These conditions alone have strong implications for the industrial organization of certification markets: 1) Honest certification requires high prices that may even exceed the static monopoly price. 2) Honest certification exhibits economies of scale and constitutes a natural monopoly. 3) Price competition tends to a monopolization. The results derive from a general principle of reputation models that favors concentration. This principle implies benefits from specialization and explains specialized certifiers as efficient market institutions that sell reputation as a service to other firms.

• Item Type: Paper (Discussion Paper)
• Keywords: certification, collusion, bribery, reputation, natural monopoly
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A1 - Allokationsmechanismen in Organisationen und Märkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: L15, D82, L11
• Language: English