Two-Sided Reputation in Certification Markets

Abstract

In a market where sellers solicit certification to overcome asymmetric infor-mation, we show that the profit of a monopolistic certifier can be hump-shaped in itsreputation for accuracy: a higher accuracy attracts high-quality sellers but sometimesrepels low-quality sellers. As a consequence, reputational concerns may induce the certi-fier to reduce information quality, thus depressing welfare. The entry of a second certifierimpacts reputational incentives: when sellers only solicit one certifier, competition plays adisciplining role and the region where reputation is bad shrinks. Conversely, this regionmay expand when sellers hold multiple certifications.

Reference

Matthieu Bouvard, and Raphaël Levy, “Two-Sided Reputation in Certification Markets”, Management Science, vol. 64, n. 10, October 2018, pp. 4755–4774.