Championing and shaming in a credence good market: Which one to use?

Abstract

AbstractWe analyze the performance of the championing and shaming inquiries by a Nongovernmental Organization in a signaling game played by a monopoly that sells a credence good to an uninformed consumer. Championing (shaming) means certifying (uncovering) a firm that sells a high (low) quality product. An inquiry alters the whole information structure of the signaling game. It provides redundant hard information in a separating equilibrium but it lowers the set of separating prices. We show that a high‐quality producer and the consumers welcome this inquiry in a pooling equilibrium as it enhances their expected payoffs. They prefer a championing over a shaming inquiry when the likelihood of a high‐quality producer is low. A championing inquiry may lower the consumer's expected payoff if it is run before the monopoly sets its price since the consumer may prefer paying a low pooling price for a credence good rather than a high price for a certified high‐quality good.