Competition vs. quality in an industry with imperfect traceability

We consider an industry where firms produce goods that have different quality levels but firms cannot differentiate themselves from rivals. In this situation, producing low-quality generates a negative externality on the whole industry. This is particularly true when consumers cannot identify producers. In this article, we show that under a "Laissez Faire" situation free entry is not socially optimal and we argue that the imposition of a Minimum Quality Standard (MQS) may induce firms to enter the market.