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Using Labels to Sow the Seeds for Better Products

May 12, 2010

Using Labels to Sow the Seeds for Better Products
RFF Feature
May 12, 2010

Using Labels to Sow the Seeds for Better Products

For many goods, the only way to determine their quality is by using them; these are called “experience goods.”  Consumers generally buy a product and develop an opinion of the company producing it based on its quality. For products like most fruits and vegetables, however, the producer is unknown and the set of indistinguishable firms develops a collective reputation. In such cases, an individual producer has no way to distinguish the quality of his produce from that of his competitors, decreasing his motivation to offer high quality goods. 

In a new RFF discussion paper, “Markets with Untraceable Goods of Unknown Quality: A Market Failure Exacerbated by Globalization,” authors Timothy McQuade, Stephen W. Salant, and Jason Winfree examine two solutions to this problem: labeling and minimum quality standards. Finer classifications of a country's exports such as by region of a country or whether or not produce is organic would raise quality, consumer welfare, and the profits of exporters since there would be fewer firms producing goods within each distinguishable classification and hence stronger incentives for each firm to offer goods of high quality.

Moreover, a minimum quality standard  imposed on an identifiable group of exports would benefit consumers and would raise the profits of firms compelled to comply with that standard. On the other hand, profits of firms with unregulated products would fall since consumers would expect their goods to be of lower quality in comparison, depressing their prices.