Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry

Miguel Carriquiry, Bruce A. Babcock
November 2004  [04-WP 377]

Participants in a supply chain of agricultural value-added products face significant challenges. Many of the costly distinctive traits are difficult (if not impossible) to observe even after consumption. A complicating factor, addressed here, is that in some circumstances delivered quality can only be imperfectly learned and/or affected stochastically by producers. In order for markets for these goods to arise, firms touting the quality of the product need to be trusted. In response to these challenges, new (and diverse) quality assurance systems (QASs) that facilitate the acquisition and flow of information about agricultural and food products are being put in place. A repeated-purchases model is developed to explore the fundamental economic factors that lie behind the choice of different QASs and their associated degrees of stringency by firms. Differences in the quality discoverability of a sought-after attribute, market structure, attractiveness of a market, nature of reputations, and the value placed in the future are among the factors contributing to the implementation of widely diverse systems across participants in different markets. Close attention is paid to the role of reputations in providing the incentives for firms to deliver high-quality goods. We model three different scenarios—monopoly, duopoly with firm-specific reputations, and duopoly with industry-wide reputations—and compare the resulting welfare of processors and their customers. We also provide a rationale for the branding efforts of many firms to distinguish their products along the supply chain.

Keywords: imperfect information, product quality, quality assurance, repeated purchases, reputations, supply chain, value-added agriculture.

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