Certification under oligopolistic competition

In the first essay, I analyze a symmetric duopolistic market where each firm's choice regarding certain quality attributes such as the environmental friendliness of its product is its own private information. I find that the extent of horizontal differentiation between firms plays a crucial role in a certifier's optimal certification policy. Under a non-profit certifier it is always the case that both firms produce the highest quality and opt for certification. This is also the case under a for-profit certifier, but only when the degree of horizontal differentiation is sufficiently high. When horizontal differentiation is low, the for-profit certifier, by charging a very high certification fee, creates maximum vertical differentiation between firms. As a result, only one firm produces the highest quality and opts for certification whereas the other firm produces the lowest quality and does not opt for certification. This asymmetry under a for-profit certifier makes the market inefficient, which provides one possible explanation for the existence of mostly non-profit certifiers in such markets.