Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry

A repeated-purchases model is developed to explore the fundamental economic factors that lie behind the choice of different quality assurance systems and their associated degrees of stringency by firms. Differences in the quality discoverability of a sought-after attribute, market structure, attractiveness of a market, nature of reputations, and the value placed in the future are among the factors contributing to the implementation of widely diverse systems across participants in different markets. Close attention is paid to the role of reputations in providing the incentives for firms to deliver high-quality goods. We model three different scenarios - monopoly, duopoly with firm-specific reputations, and duopoly with industry-wide reputations - and compare the resulting welfare of processors and their customers. We also provide a rationale for the branding efforts of many firms to distinguish their products along the supply chain.