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Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods

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  • Dulleck, Uwe
  • Kerschbamer, Rudolf

Abstract

This paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable, and if they face competition by discounters who are not able to perform a diagnosis. The unobservability of diagnosis effort and the credence characteristic of the good induce experts to choose incentive compatible tariff structures. This makes them vulnerable to competition by discounters. We explore the conditions under which honestly diagnosing experts survive competition by discounters; we identify situations in which experts misdiagnose consumers in order to prevent them from free-riding on experts' advice; and we discuss policy options to solve the free-riding consumers-cheating experts problem.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 1 (January)
Pages: 15-23

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Handle: RePEc:eee:indorg:v:27:y:2009:i:1:p:15-23

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Experts Discounters Credence goods Free-riding consumers Free diagnosis Contingent diagnostic fees;

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References

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  1. Ingela Alger & Francois Salanie, 2001. "A Theory of Fraud and Over-Consumption in Experts Markets," Boston College Working Papers in Economics 495, Boston College Department of Economics, revised 09 Nov 2004.
  2. Ting Liu, 2006. "Credence Goods Markets with Conscientious and Selfish Experts," Boston University - Department of Economics - Working Papers Series WP2006-058, Boston University - Department of Economics.
  3. Winand Emons, 1995. "Credence Goods Monopolists," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp9501, Universitaet Bern, Departement Volkswirtschaft.
  4. Kala Krishna & Tor Winston, 2003. "If at First You Don't Succeed: Profits, Prices, and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 573-597, 05.
  5. Bouckaert, J.M.C. & Degryse, H.A., 1998. "Price competition between an expert and a non-expert," Discussion Paper, Tilburg University, Center for Economic Research 1998-49, Tilburg University, Center for Economic Research.
  6. Pitchik, Carolyn & Schotter, Andrew, 1987. "Honesty in a Model of Strategic Information Transmission," American Economic Review, American Economic Association, vol. 77(5), pages 1032-36, December.
  7. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  8. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
  9. Kai Sülzle & Achim Wambach, 2005. "Insurance in a Market for Credence Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(1), pages 159-176.
  10. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 417-437, 04.
  11. Emons, Winand, 1998. "Product Differentiation and Price Competition Between a Safe and a Risky Seller," CEPR Discussion Papers 2041, C.E.P.R. Discussion Papers.
  12. Dulleck, Uwe & Kerschbamer, Rudolf, 2005. "Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need," CEPR Discussion Papers 5242, C.E.P.R. Discussion Papers.
  13. Yuk-fai Fong, 2005. "When Do Experts Cheat and Whom Do They Target?," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 113-130, Spring.
  14. Perry, Martin K & Besanko, David, 1991. "Resale Price Maintenance and Manufacturer Competition for Exclusive Dealerships," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 517-44, September.
  15. Howard P. Marvel & Stephen McCafferty, 1984. "Resale Price Maintenance and Quality Certification," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 346-359, Autumn.
  16. Bolton, Patrick & Bonanno, Giacomo, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 555-70, August.
  17. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp9402, Universitaet Bern, Departement Volkswirtschaft.
  18. Asher Wolinsky, 1993. "Competition in a Market for Informed Experts' Services," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 380-398, Autumn.
  19. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 53-74, February.
  20. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society.
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Cited by:
  1. Bonroy, Olivier & Lemarié, Stéphane & Tropéano, Jean-Philippe, 2013. "Credence goods, experts and risk aversion," Economics Letters, Elsevier, vol. 120(3), pages 464-467.
  2. Dulleck, Uwe & Kerschbamer, Rudolf & Konovalov, Alexander, 2014. "Too Much or Too Little? Price-Discrimination in a Market for Credence Goods," Working Papers in Economics 582, University of Gothenburg, Department of Economics, revised Apr 2014.
  3. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
  4. Dominik Erharter, 2012. "Credence goods markets, distributional preferences and the role of institutions," Working Papers 2012-11, Faculty of Economics and Statistics, University of Innsbruck.
  5. Alexander Frankel & Michael Schwarz, 2009. "Experts and Their Records," NBER Working Papers 14921, National Bureau of Economic Research, Inc.
  6. repec:hal:cesptp:hal-00976890 is not listed on IDEAS

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