Segmentation and pricing behavior in a market for certification

Abstract

The paper offers a simple theory of pricing behavior in certification markets. The basis for the theory is that certifiers offer differentiated tests; for an object of given quality it may be more difficult to pass the test of certifier i than the test of certifier j. Given the test standards, certifiers compete for customers via their simultaneous pricing decisions. In equilibrium, each certifier attracts a connected segment of the market, and sellers of high quality products pay a higher price for certification than sellers of low quality products. Lemons may be certified in equilibrium, although the responsible certifier could have screened off the lemons by charging a higher price. The theory is applied to the US market for MBA education and finds support.