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

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Author Info
Dulleck, Uwe
Kerschbamer, Rudolf

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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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File URL: http://www.sciencedirect.com/science/article/B6V8P-4S0YXGY-1/2/40a3ab331de941e0547788afc8ef0b04
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Publisher 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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Related research
Keywords: Experts Discounters Credence goods Free-riding consumers Free diagnosis Contingent diagnostic fees;

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  1. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
    Other versions:
  2. 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.
  3. Bolton, Patrick & Bonanno, Giacomo, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 555-70, August. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  5. Winand Emons, 1998. "Product Differentiation and Price Competition between a Safe and a Risky Seller," Diskussionsschriften dp9808, Universitaet Bern, Departement Volkswirtschaft.
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  6. 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. [Downloadable!]
  7. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 53-74, February. [Downloadable!] (restricted)
  8. Bouckaert, Jan & Degryse, Hans, 1998. "Price Competition Between an Expert and a Non-Expert," CEPR Discussion Papers 1905, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  14. 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. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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  16. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society. [Downloadable!]
  17. Uwe Dulleck & Rudolf Kerschbamer, 2006. "On Doctors, Mechanics, and Computer Specialists: The Economics of Credence Goods," Journal of Economic Literature, American Economic Association, vol. 44(1), pages 5-42, March. [Downloadable!] (restricted)
  18. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 417-437, 04. [Downloadable!] (restricted)
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  19. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law & Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
  20. Perry, Martin K & Besanko, David, 1991. "Resale Price Maintenance and Manufacturer Competition for Exclusive Dealerships," Journal of Industrial Economics, Blackwell Publishing, vol. 39(5), pages 517-44, September. [Downloadable!] (restricted)
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