Labelling contests with endogenous precision

Research output: Working paperDiscussion paper

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DateIn preparation - 2012
Number of pages32
Original languageEnglish

Abstract

This paper introduces a novel type of imperfectly discriminatory contest which endogenises the cost of compiling the relative ranking it is based on. As a first application, we propose a simple theory of labelling for credence or experience goods of differing quality. We model the competition for the first, second, etc.\ labels as a rank order tournament in which firms can jointly control the ranking precision through the release of individual information. This information may be interpreted as endogenously established (input for) labelling agencies, experts or regulatory bodies. While the labels can be seen as a public good guiding the consumers' purchasing decisions, individual firms have incentives to free ride on the competitors' information emission. The theory seems to be applicable to many industries including advertising, investment rating, the production (and pirating) of computer software, movies or music, etc.

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