Honest Certification and the Threat of Capture

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  • 1 January 2004
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      • Published in RePEc
Abstract
This paper derives conditions under which reputation enables certifiers to resist capture. These conditions alone have strong implications for the industrial organization of certification markets: 1) Honest certification requires high prices that may even exceed the static monopoly price. 2) Honest certification exhibits economies of scale and constitutes a natural monopoly. 3) Price competition tends to a monopolization. The results derive from a general principle of reputation models that favors concentration. This principle implies benefits from specialization and explains specialized certifiers as efficient market institutions that sell reputation as a service to other firms.

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