Economics of food certification

Diogo Souza Monteiro

Kent Business School

Why should we care?

• Agro-food markets are increasingly differentiated– Quality attributes such as organic or local are used

• E.g. organic market was worth 13 billion euros (2005)

• Variety of quality schemes– Private vs Public driven– Some are becoming condition to enter markets

• EU Agricultural Product Quality Policy– B2B quality assurance schemes (EurepGAP)– B2C quality schemes (PDO/PGI, Organic,Fair trade,

etc

• All these quality schemes require certification

Outline• What is certification?• Information asymmetries and certification• Research questions• What was found?• What affects the number of certifiers in a

market?• Certifiers size and quality of certification? • Answers thus far…• Future research

What is certification?• Is the act of verifying whether a standards is

met.• More formally is the verification of conformity

to a standard by an accredited 3rd party (Meuwissen et al 2003)

• Why is it necessary?• To reduce information asymmetries (credence and

Potenkim goods)• Facilitates trade reducing transaction cost

• Thus …Quality control and certification underpin all (?) quality assurance schemes

Information asymmetries and certification

• Search and experience goods (Nelson 1970)

• Quality claims are easily verified• Immediately (eg. variety of

apple)• Through repeated sales

(beef tenderness)

• First (seller) and second party (buyer) certification is enough

• Rely on reputation and trust on the product

• Credence (Darby & Karni 1973) and Potemkin (Tiezle&Weber 1991)– Cannot be verified by

buyers– Uncertainty

• Require 3rd party!• Need to rely on certifiers

Research questions

• Clearly there is a market for certification services… But– How does it work? Is it efficient?

– How to evaluate certification services?

– What performance/benchmarks should we define?

What was found (1)

• Tirole (1986) uses a PA model to show how certifiers may collude with one of the other parties to reduce the availability of information.

• Choi and Scarpa (1994) finds that the size of a auditor may impact the quality of its service.

• Lizzeri (1999) proposes a game theory model and finds that the more competitive is the auditing market the more information is revealed.

• Third party certifiers are opportunistic agents and moral hazard may affect quality of certification [Jahn et al (2005); Hatanaka and Busch (2008)]

What was found (2)• Albersmeier et al (2009) did an empirical analysis of

certifiers in the German meat industry• They compared differences in auditing and certification

practices• There is evidence to question validity and reliability of

third party practices, namely:– Inconsistencies in the auditing processes

• Within and across certifiers

– Issues and inefficiencies in certification• Auditors may not be as attentive to reduce costs or pay lip

service

– Economic dependencies and ‘courtesy certification’• Certifiers seem to be softer on powerful clients…

What affects the number of certifiers in a market?

• We analyzed competition between EurepGAP certifiers– 100 accredited, 28 countries

• The number of certifiers depends on:– Export orientation– Years of entry– Presence of a multinational certifier

Certifiers’ size and quality of certification

• We adapted a Choi and Scarpa (1994) to investigate a monopolistic third party optimal certification effort

Findings:– The optimal amount of product certified is indirectly

affected by average effort.– There may be restrictions on product certified to collect

a rent– However it can also make use of economies of scale to

increase overall quality– Given the credence nature of certification a monopolistic

TPCs may collect rents

Answers thus far…

• Certification is costly… but not clear benefits to sellers (Renard 2005)– How should we price certification

• There are inefficiencies in the market– Structural … certification is a credence good– Operational (see Albersmeier et al)

Future work

• How can we compare TPC?– Take into account:

• Differences across standards, • Differences across products and pools of producers

• What performance measure?– Ratio of certified product?– Ratio of subjective vs. objective measures?

• How to cost/price certification? • Should every firm pay the same fee?• Does traceability facilitate/hinder costs of certification?

Diogo Souza Monteiro

Lecturer in MarketingKent Business School, University of Kent

Canterbury, Kent, CT2 7PE UKT:+44(0)1227 823769; F:+44(0)1227 761187

Email: D.M.Souza-Monteiro@kent.ac.uk