Information asymmetry is a major challenge for trade. Through time various third parties have emerger to assure the buyer about the quality of the goods being offered in the market. These third parties include among others government agencies (e.g. trade licensing) for profit trade agencies (e.g. credit ratings) and online platforms. Online platforms badge and label products in order to assure the customers about the quality of the goods. Xiang has investigated a policy the platform changed replaced the “Powerseller” badge awarded to particularly virtuous sellers with the “eBay Top-Rated Seller” (eTRS) badge. The new badge needed more stringent requirements. Thus fewer sellers obtained it. The third party assurance then became more trustworthy. Xiang and his colleagues tracked the market changes after this policy change. As the certification bar raised, the entry was encouraged at the tails of the quality distribution not the middle. In other words, the quality distribution of goods being offered in eBay got a fatter tail. Those entrants, whose quality is very high, benefited from a more selective certification label, more compelling for customers. On the other side of the spectrum, low quality sellers benefited from being pooled with better and more unbadged sellers.
The results suggest that the quality of incumbents (those who were already in the market) did not change their goods or increase the quality at all. Only a small fraction of sellers who previously were badged and lost it after the certification became more stringent, enhanced their quality to regain their bagged. They were possibly those sellers whose marginal benefit from regaining the certification badge was higher than the cost of enhancing the quality.
Restricting attention to well-defined products, they found that, aside from the products of sellers who lose their badge, relative prices increased after policy change.
Source: American Economic Association (Raising the Bar: Certification Thresholds and Market Outcomes)
