Different Arrangements to Assure Quality: A Focus on Designations of Origin

Abstract

Using a game theory model, this article reveals the economic rationale underlying the choice between different arrangements to safeguard quality, including Designations of Origin (DO). The model considers a duopoly with vertical differentiation and variability in the level of quality, where independent firms choose to compete freely, to merge in a cooperative or to become a DO. Results show that DOs are privately optimal and, in some cases, also socially optimal. In addition, several important features of hybrid organizations are explained by the model. These features include some of the main characteristics of a DO, such as enhancing quality in the market and managing competition among participants in price and quality, while, at the same time, they work together under the same brand or cooperate on different dimensions of quality.