Label Signal And Credence Goods Market Equilibrium Morphology

In recent years, food safety issues occur frequently. The main reason is that food safety has the characteristic of “trust goods”, which results in asymmetric information problems in food trading. Sellers have more private information about product quality than buyers, and consumers can’t judge whether food is safe or not only through observation. Even for a long period of time after consumption, consumers still are unable to accurately tell the real quality. Consumers can only rely on quality information released by manufacturers to understand the internal quality control of the food business. Among the food safety problems, the first problem to be solved is how to pass product quality information effectively on to consumers. From the consumer’s point of view, this article selects “price” and “label” as a way to transmit quality information, classifies consumers into “sensitive consumers” and “slow consumers” according to different consumer behaviors, implants consumer preferences into manufacturer’s decision-making process, constructs utility function based on consumer preference, and builds a two stage dynamic game model based on “profit maximization” of the manufacturers. Finally, based on the analysis of the two kinds of labeling system and the elements that affect separation equilibrium condition’s similarities and differences, this article makes corresponding policy suggestions.The results show:(1) Under the “third-party certification” labeling system, there are four game results between two manufacturers. When high-quality manufacturer has third-party certification, and low-quality manufacturer does not disguise identity and sets a low price, or when high-quality manufacturer has no third-party certification, and low-quality manufacturer does not disguise identity and sets a low price, the market will appear separating equilibrium. While when high-quality manufacturer has third-party certification, and low-quality manufacturer disguises identity and sets a high price, or when high-quality manufacturer has no third-party certification, and low-quality manufacturer does not disguise identity but sets a high price, the market will appear pooling equilibrium. The high cost of “third-party certification” and high-quality product are the main reason why high-quality manufacturers have no third-party certification. When the power of government supervision and punishment is weak, costs of low-quality product are high, prices of high-quality produces are comparatively low, and percentage of “sensitive” consumer is high, low-quality manufacturers tend to have the motivation to be disguised as high-quality manufacturers.(2) Under the “independent identification” labeling system, when the behavior of high-quality manufacturer is established, there are also four game results between two manufacturers. When low-quality manufacturer has independent identification but sets a high price, or when it has independent identification and sets a low price, or when it has no independent identification and sets a low price, the market will appear separating equilibrium. While when low-quality manufacturer has no independent identification and sets a high price, the market will appear pooling equilibrium. When the power of government supervision and punishment is weak, costs of low-quality product are high, prices of high-quality produces are comparatively low, and percentage of “sensitive” consumer is low, low-quality manufacturers tend to have the motivation to be disguised as high-quality manufacturers.(3) Based on the similarities of separating equilibrium under the two labeling systems, three suggestions are given. First, relevant laws and regulations need to be established and improved, and supervision and punishment of low quality manufacturers should be enhanced. Second, high-quality manufacturers should raise their prices, thus increasing the difficulty of low-quality manufacturers to disguise. Third, low-quality manufacturers need to lower the costs. Based on the differences of separating equilibrium under the two labeling systems, two suggestions are given. First, we should encourage high-quality manufacturers to adopt third-party certification system, and also decrease the cost of third-party certification. Second, high-quality manufacturers need to lower the costs. Last but not the least, here’s one more suggestion for the establishment of trust goods market under the “independent identification” labeling system: improve the quality level of the consumers, and increase the proportion of sensitive consumers.