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Abstract
We study firms that supply a vertically and horizontally differentiated service in a market with regulated prices. The incentives for seeking accreditation are more significant for sellers of below‐average quality services relative to sellers of above‐average quality services. For homogenous firms, profits are lower in equilibria where both firms seek accreditation relatively to equilibria where neither does. Private and social accreditation incentives typically differ. The welfare optimal reimbursement rate is independent of a firm's actual accreditation decision but dependent on the accreditation decision of the rival. Hence, policies that give extra financial support to firms that accredit are likely to promote inefficiency.
Highlights
According to van Damme (2004), “Accreditation is a particular form of quality assurance, with, as the distinctive characteristics, that it leads to the formal approval of an institution that has been found by a legitimate body to meet predetermined and agreed upon standards, eventually resulting in an accredited status granted by responsible authorities” (p. 129)
In some cases such verifications are difficult, and we observe accrediting bodies that verify compliance with certain input standards that may transform into product quality improvements
In the case of process accreditation, unlike output accreditation, there is no exact verification of the product quality level, implying that accreditation in general need not give quality improvements
Summary
According to van Damme (2004), “Accreditation is a particular form of quality assurance, with, as the distinctive characteristics, that it leads to the formal approval of an institution that has been found by a legitimate body to meet predetermined and agreed upon standards, eventually resulting in an accredited status granted by responsible authorities” (p. 129). Another possibility is that the accreditation standard is higher than the quality level provided initially by both firms: S > H > L (this type is denoted OH) If this is the case, we arrive at the following expressions for the quality addition and the relative quality-addition (for OH). The case of homogeneous firms is characterized by firms that have identical costs, where the consumers perceive the firms to have the same initial quality, and where the accreditation decision is expected to give the same increase in quality; that is, c1 = c2 = c, τ1 = τ2 = τ, F1 = F2 = F, b1 = b2 = b and V1 = V2 = V Given these assumptions, we get from 3a that the two firms' initial market shares are identical and defined by d = 12. Notice that the threshold values become closer as the accreditation unit cost in, τ, approaches zero
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