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Can Minimum Prices Assure the Quality of Professional Services?

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  • Georg Meran
  • Reimund Schwarze

Abstract

This papers studies the effects on service quality and consumer surplus of a minimum price which is fixed by a bureaucratic non-monopolistic professional association. It shows that the price floor set by a Niskanen-type professional assocation will maximize consumer surplus only if consumers demand the highest possible average quality. If consumers demand services of lesser quality, the association's price floor will be too high if measured by consumer surplus. Moreover we show that a de-regulated market will always reproduce the favorable result of a uniformly high price in the case of top quality demand while delivering superior results in the case of a mixed demand for high and low quality services. The general picture that emerges from this discussion is that the current EU Commission's initiative to abolish fixed price schemes for professional services will not lead to a decrease in quality that would be undesirable from a standpoint of consumer protection. This holds even if we acknowledge the opponent's claim that there is a chance of deprivation of professional ethics due to price competition.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43866.de/dp531.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 531.

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Length: 20 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp531

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Related research

Keywords: Liberal professions; Price regulation; Quality; Professional association; Self-regulation; EU competition policy; Intrinsic motivation;

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References

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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
  3. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
  4. Morris M. Kleiner, 2000. "Occupational Licensing," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 189-202, Fall.
  5. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.
  6. Maurizi, Alex, 1974. "Occupational Licensing and the Public Interest," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 399-413, Part I, M.
  7. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  8. Matthews, Robin C O, 1991. "The Economics of Professional Ethics: Should the Professions Be More Like Business?," Economic Journal, Royal Economic Society, vol. 101(407), pages 737-50, July.
  9. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-46, December.
  10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  11. Julia Liebeskind & Richard P. Rumelt, 1989. "Markets for Experience Goods with Performance Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 601-621, Winter.
  12. Morton I. Kamien & Daniel R. Vincent, 1991. "Price Regulation and Quality of Service," Discussion Papers 920, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  14. Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
  15. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
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Cited by:
  1. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.

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