Abstract
In a symmetric duopolistic market where each firm’s choice regarding certain quality attributes such as the environmental friendliness of its product is its own private information, the extent of horizontal differentiation between firms plays a crucial role in a certifier’s optimal certification policy. Under a non-profit certifier it is always the case that both firms produce the highest quality and opt for certification. This is also the case under a for-profit certifier, but only when the degree of horizontal differentiation is sufficiently high. When horizontal differentiation is low, the for-profit certifier, by charging a very high certification fee, creates maximum vertical differentiation between firms. As a result, only one firm produces the highest quality and opts for certification whereas the other firm produces the lowest quality and does not opt for certification. This asymmetry under a for-profit certifier makes the market inefficient, which provides one possible explanation for the existence of mostly non-profit certifiers in such markets.
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