Certification Design for a Competitive Market

TL;DR

This paper analyzes a market with hidden quality levels where a certifier provides signals and charges fees, establishing unique equilibrium certification levels and designing algorithms for optimal certification pricing.

Contribution

It introduces a model for certification markets with strategic seller choices, proving uniqueness of equilibrium and developing an FPTAS for optimal certification pricing.

Findings

Unique equilibrium certification levels under single-crossing condition

Reduction of certifier's revenue maximization to a nonlinear pricing problem

Development of an FPTAS for optimal certification and pricing

Abstract

Motivated by applications such as voluntary carbon markets and educational testing, we consider a market for goods with varying but hidden levels of quality in the presence of a third-party certifier. The certifier can provide informative signals about the quality of products, and can charge for this service. Sellers choose both the quality of the product they produce and a certification. Prices are then determined in a competitive market. Under a single-crossing condition, we show that the levels of certification chosen by producers are uniquely determined at equilibrium. We then show how to reduce a revenue-maximizing certifier's problem to a monopolistic pricing problem with non-linear valuations, and design an FPTAS for computing the optimal slate of certificates and their prices. In general, both the welfare-optimal and revenue-optimal slate of certificates can be arbitrarily large.