Bougherara, Douadia <br/><br/>
Market Efficiency with Costly Information on Product Quality: An Application to Eco-labeled Products 

 -  2008.<br/>							 
<br/><br/> 94 
<br/><br/> Market-failure theory is often used to argue that eco-labeling is a way of increasing market efficiency. We show that, because of additional costs, this may not always be true. We identify three types of information costs regarding quality that may arise with an eco-label. We then measure the market&amp;apos;s ability to provide high-quality goods and buyers&amp;apos; behavior toward information purchase in laboratory posted-offer markets with varying information costs. We find that markets with information costs are inefficient. For sellers, the probability of offering high-quality goods increases with expected profits but decreases with information costs. For buyers, even low information costs imply a significant surplus loss. We conclude that the function linking information purchase and product price is non-linear and depends on buyers&amp;apos; beliefs about the relationship between product prices and quality. The design of eco-labels thus plays a crucial role in their success.