Munich Personal RePEc Archive

Markets with untraceable goods of unknown quality: a market failure exacerbated by globalization

McQuade, Timothy and Salant, Stephen W. and Winfree, Jason (2009): Markets with untraceable goods of unknown quality: a market failure exacerbated by globalization.

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Abstract

In markets for many fruits, vegetables, and an increasing number of imported goods, consumers cannot discern the quality of a product prior to purchase and can never identify its producer. Producing high-quality, safe goods is costly for a firm and raises the collective reputation for quality shared with its rivals. Minimum quality standards improve welfare. If consumers observe the country of origin of a product, quality, profits, and welfare increase. Exports from countries with more exporting firms are of lower quality and sell for lower prices. If one country imposes a minimum quality standard on its exports while other countries do not, consumers benefit. As for sellers, the regulation raises the profits of firms in the country with regulation and lowers the profits of firms in countries without regulation.

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