Certification, Reputation and Entry: an Empirical Analysis

Abstract: Markets often use third-party certification labels to distinguish between higher- and lower-quality sellers, yet little is known about how certification impacts the evolution of markets.We exploit a policy change on eBay to explore how more selective certification affects entryand behavior across many online markets. Entry increases after the policy change and doesso more intensely in markets where more sellers lost certification. The quality distribution ofentrants exhibits fatter tails ex-post and some incumbents increase the quality of their serviceto maintain certification. The results inform the design of certification policies in electronic andother markets.