Minimum quality standard regulation and entrepreneurial innovation
| Published date | 08 July 2019 |
| Pages | 217-225 |
| DOI | https://doi.org/10.1108/JEPP-D-18-00020 |
| Date | 08 July 2019 |
| Author | Bryan C. McCannon |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Minimum quality
standard regulation and
entrepreneurial innovation
Bryan C. McCannon
Department of Economics, West Virginia University,
Morgantown, West Virginia, USA
Abstract
Purpose –The purpose of this paper is to explore the impact that minimum quality standards have on
product quality when entrepreneurial innovation is considered.
Design/methodology/approach –The author develops a game-t heoretic model. It is a sta ndard
vertical product diff erentiation model, bu t incorporates a minimu m quality standard and un certain
entrepreneurial inn ovation.
Findings –While the minimum quality standard increases the expected quality of the low-quality product,
under reasonable circumstances the expected quality of the high-quality good decreases. Thus, average
quality can decrease with regulation intended to increase product quality.
Research limitations/implications –Past research on minimum quality standards does not consider its
impact on entrepreneurial effort when their innovation investments lead to uncertain outcomes.
Practical implications –Minimum quality standard regulation can have counterproductive impacts if the
impact on entrepreneurs is not considered. The regulation can disincentivize entrepreneurs leading to lower
quality products.
Social implications –Regulation can be welfare reducing.
Originality/value –This paper is the first to incorporate entrepreneurial innovation into a product quality
model to explore the impact of minimum quality standard regulation.
Keywords Entrepreneurship, Regulation, Product quality, Minimum quality standard,
Vertical product differentiation
Paper type Research paper
1. Introduction
A standard type of government regulation in markets is that of minimum quality standards.
A minimum quality standard is an intervention in a vertically differentiated market
(i.e. those differing in product “quality”) where products whose quality falls below a set
threshold is restricted. For example, vehicle fuel efficiency regulations (e.g. CAFE) penalize
the sale of vehicles whose miles per gallon is below a set standard[1].
The argument supporting minimum quality standards is that they act to raise the
average quality of goods produced, improving consumer surplus. Frequently, normative
arguments are used to justify their use. Alternatively, attempts at providing efficiency
properties of minimum quality standard regulation searches for their application to markets
where consumers are asymmetrically informed about product quality (Shapiro, 1983;
Garella and Petrakis, 2008), or when negative (Ecchia et al., 2013) or positive (Ronnen, 1991)
externalities exist.
Theobjectiveofthispaperistoilluminateanadverseconsequenceofminimumquality
standards. I consider entrepreneurs who must first make innovation investments to develop
their product. This innovation leads to an uncertain product quality, but increased investments
improve his or her expected quality. I compare and contrast the outcomes with and without
minimum quality standardregulation. I showthat the standards alsohave incentive effects on
the high-quality producer. There are both direct effects and ind irect effects. Regarding the
Journal of Entrepreneurship and
Public Policy
Vol. 8 No. 2, 2019
pp. 217-225
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00020
Received 15 June 2018
Revised 9 July 2018
Accepted 10 July 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —D84, D03, C72
217
Minimum
quality
standard
regulation
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