Intermediaries, Credibility and Incentives to Collude

E.-A. PEYRACHE, L. Quesada

Journal of Economics and Management Strategy

December 2011, vol. 20, n°4, pp.1099-1133

Departments: Economics & Decision Sciences

Keywords: Intermediaries, Collusion and soft information, Credibility and market structure

A seller contracts and potentially colludes with a certification intermediary. We investigate the intermediary’s incentives to collude, her pricing strategy, and the extent to which buyers rely on the intermediary’s announcements. The probability of collusion is an endogenous variable, determined by the intermediary’s pricing strategy. The extent to which the market relies on the intermediary’s reports, the certification price and the intermediary’s profit decrease as the intermediary becomes less patient. By making certification mandatory, the intermediary loses her ability to screen out low-quality sellers, which increases the probability of collusion