Minimum safety standard, consumers' information and competition

This paper explores the effects of a standard influencing care choice with an endogenous market structure. Under duopoly, firms compete either in prices or in quantities. Firm(s) may increase the probability of offering safe products by incurring a cost. A standard may correct a safety underinvestment by firms. It is shown that the market structure (duopoly or monopoly) linked to the standard depends on the available information. Under perfect information about safety for consumers, the selected standard is always compatible with competition. The absence of standard due to safety overinvestment by firms only emerges under competition in quantities and a relatively low cost of safety improvement. Under imperfect information about safety for consumers, the selected standard often leads to a monopoly situation, essential for covering the cost of safety improvement. However, for relatively high values of this cost, a standard cannot impede the market failure arising from the lack of information.