Accreditation in regulated markets

Abstract

We study firms that supply a vertically and horizontally differentiated service in a market with regulated prices. The incentives for seeking accreditation are more significant for sellers of below‐average quality services relative to sellers of above‐average quality services. For homogenous firms, profits are lower in equilibria where both firms seek accreditation relatively to equilibria where neither does. Private and social accreditation incentives typically differ. The welfare optimal reimbursement rate is independent of a firm's actual accreditation decision but dependent on the accreditation decision of the rival. Hence, policies that give extra financial support to firms that accredit are likely to promote inefficiency.