Review of Industrial Organization 23: 43–64, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Can Quality Certiﬁcation Lead to Stable Cartels?
UMR Economie Publique INRA-INAPG, Paris
JOHN M. CRESPI
Department of Agricultural Economics, Kansas State University
Abstract. Cartel stability is investigated in a context of adverse selection where consumers are
imperfectly informed about product quality. Producer collusion may be necessary to signal quality
via third-party certiﬁcation. While examining different cost structures for third-party certiﬁcation,
we show that a stable cartel that provides information about product quality may improve overall
welfare even if producers collude to reduce competition.
Key words: antitrust, asymmetric information, cartel-formation process, signal.
JEL Classiﬁcation Numbers: D82, L15, L41.
This paper focuses on the relationship between cartel formation and quality certi-
ﬁcation. In agricultural and other commodity markets, producer associations using
common labels or trademarks are frequent. Our aim is to understand the effect that
such legal cartels have on the market by assessing a ﬁrm’s strategic choice to join
or refrain from joining these associations.
An adverse selection framework is analysed using cartel theory under Cournot
competition with many sellers. In our framework, a respected third-party certi-
ﬁcation may provide information about product quality for imperfectly informed
buyers. Individual sellers can choose whether or not they wish to signal the quality
of their products independently or join a cartel. We distinguish the cases where
producers can and cannot share the cost of certiﬁcation. The concept of sequential
cartel formation given by Prokop (1999) is used to examine the actions of sellers
who join a cartel.
We show that, where third-party certiﬁcation is available and regulation al-
lows cooperation (as occurs in many agricultural markets), a stable cartel may
Corresponding author: Stephan Marette, UMR Economie Publique INRA INAPG, 16 rue
Claude Bernard, 75005 Paris, France. Phone: 33 1 44 08 72 72. Fax: 33 1 44 08 17 31. E-mail:
email@example.com. We especially thank Richard Sexton for his helpful comments. We also thank
Giacomo Bonanno, Colin Carter, B
edicte Coestier and Dan Sumner. All errors are ours.