Reputation, Quality Observability, and the Choice of Quality Assurance Systems
Miguel Carriquiry, Bruce A. Babcock
September 2004 [04-WP 373]
Carriquiry, M. and B.A. Babcock. 2004. "Reputation, Quality Observability, and the Choice of Quality Assurance Systems." Working paper 04-WP 373. Center for Agricultural and Rural Development, Iowa State University.
Participants in a supply chain of agricultural value-added products face significant challenges. Many of the costly distinctive traits desired by consumers 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. Hence, both symmetric and asymmetric informational imperfections may be present. In order for markets for these classes of goods to arise, firms touting the quality of the product need to be trusted. A repeated-purchases model is developed to explore the fundamental economic factors that lie behind the choice of different quality assurance systems and their associated degrees of stringency by firms. Differences in the quality discoverability of a sought-after attribute, attractiveness of a market, 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 in an environment of symmetrically imperfect information.
Keywords: imperfect information, product quality, quality assurance, repeated purchases, reputations, supply chain, value-added agriculture.