Free-entry equilibrium in a market for certifiers

Abstract

The role of certifiers is to test products for quality, and to communicate the test results to the market. We construct a free-entry model of certification, where each certifier chooses a test standard and a price for certification. In equilibrium, certifiers differentiate their test standards, and attract different segments of the market. The price for having certified a high-quality product is higher than the price for having certified a low-quality product, and the net gain from being certified increases in product quality. We test and find support for these predictions in the market for MBA education, and also discuss how to apply the model to questions of regulation and minimum quality standards.