Labeling by a private certifier and public regulation

This paper considers the effects of labels in a vertically differentiated duopoly. A label certifies the level of a product's measurable characteristic. It is shown that the certification label chosen by a private (for profit) certifier is lower than both the socially optimal and the firm's preferred one. Public policies that lead to an increase in the label can improve welfare - while also potentially benefiting firms. We fin that: (i) if public and private certification are offered, an indirect regulatory outcome is achieved (a second best) where the private certifier raises the standard of this label - even though no firm adopts the public label; (ii) two common tools, like a per unit tax on the unlabeled product or a subsidy in favor of the labeled one, lead to lower private certification standard with ambiguous effects on welfare; (iii) and ad valorem tax on the unlabeled product, by contrast, increases welfare.