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Abstract
Large retail chains have spent considerable resources to promote production protocols and
traceability across the supply chain, aiming at increasing food safety. Yet, the majority of consumers are
unaware of these private food safety standards (PFSS) and retailers are not informing them. This behavior
denotes a pooling paradox: supermarkets spend a large amount of money for food safety and yet they forget
to inform consumers. The result is a pooling equilibrium where consumers cannot discriminate among high
quality and low quality products and supermarkets give up the potential price premium. This paper provides
an economic explanation for the paradox using a contract-theory model. We found that PFSS
implementation may be rational even if consumers have no willingness to pay for safety, because the
standard can be used as a tool to solve asymmetric information along the supply chain. Using the PFSS,
supermarkets can achieve a separating equilibrium where opportunistic suppliers have no incentive to accept
the contract.
Even if consumers exhibit a limited (but strictly positive) willingness to pay for safety, advertising
may be profit-reducing. If the expected price margin is high enough, supermarkets have incentive to supply
both certified and uncertified products. In this case, we show that, if consumers perceive undifferentiated
products as “reasonably safe”, supermarkets may maximize profits by pooling the goods and selling them as
undifferentiated. This result is not driven by advertising costs, as we derive it assuming free advertising.