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Quality Ambiguity and the Market Mechanism for Credence Goods

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  • Benner, Dietrich

Abstract

With credence goods consumers cannot judge actual quality neither before purchase (ex ante) nor after purchase (ex post). Trust has to replace own examination and verification. Applying Choquet-Expected Utility theory, ageneral model of credence goods is developed wich takes the problem of trust explicitly in its view and generalizes the problem of quality uncertainty on the 'market for lemmons' of Akerlof (1970) to 'quality ambiguity' with credence goods. The model shows the market mechanism only performing well in providing credence goods when consumers' trust in given information is not too low. With trust too low, sellers of credence good will be driven out of the market by trust induced adverse selection. In market equilibrium prices will always be lower compared to equilibrium prices for experience goods.

Suggested Citation

  • Benner, Dietrich, 2004. "Quality Ambiguity and the Market Mechanism for Credence Goods," Working Papers 98639, Universitaet Hohenheim, Institute of Agricultural Policy and Agricultural Markets.
    • Handle: RePEc:ags:uhgewp:98639
    DOI: 10.22004/ag.econ.98639
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    References listed on IDEAS

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    Cited by:

    1. Staus, Alexander, 2007. "An Ordinal Regression Model using Dealer Satisfaction Data," Working Papers 98632, Universitaet Hohenheim, Institute of Agricultural Policy and Agricultural Markets.

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