Discussion Paper

Markets with Untraceable Goods of Unknown Quality: A Market Failure Exacerbated by Globalization

Apr 12, 2010 | Timothy McQuade, Stephen W. Salant, Jason Winfree


In markets for fruits, vegetables, and many imported goods, consumers cannot discern quality prior to purchase and can never identify the producer. Producing high-quality, safe goods is costly and raisesthe "collective reputation" for quality shared with rival arms. Minimum quality standards imposed on all arms improve welfare. If consumers can observe the country of origin of a product, quality, profits, and welfare increase. If one country imposes a minimum quality standard on its exports, consumers benefit, the profits of arms in the country with regulation rise, and the profits of arms in countries without regulation fall.