Regulating An Experience Good In Developing Countries When Consumers Cannot Identify Producers

In developing countries, consumers can buy many goods from either the formal sector or the informal sector and choose the sector to patronize based on the product's price there and anticipated quality. We assume that firms can produce in either sector and can adjust quality at a cost. In the long run, firms produce in the sector that is more profitable. As for the consumers, we assume they cannot assess quality prior to purchase and cannot, at a reasonable cost, identify the producer of what they are purchasing. Many products (meats, fruits, vegetables, fish, grains) sold both in formal groceries and, less formally, on the street fit this description. Using this model, we investigate how a change in regulations in the formal sector affects quality, price, aggregate production and the number of firms in each sector.