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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

  • Uwe Dulleck

    ()

  • Rudolf Kerschbamer

    ()

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 induces 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-rider problem.

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File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2007-21.pdf
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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2007-21.

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Length: 31
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:inn:wpaper:2007-21

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Keywords: Experts; Discounters; Credence Goods; Advice; Free Riding;

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References

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  1. Bouckaert, Jan & Degryse, Hans, 2000. "Price competition between an expert and a non-expert," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 901-923, August.
  2. Emons, Winand, 1997. "Credence Goods Monopolists," Berkeley Olin Program in Law & Economics, Working Paper Series qt9c5508x4, Berkeley Olin Program in Law & Economics.
  3. Winand Emons, 1998. "Product Differentiation and Price Competition between a Safe and a Risky Seller," Diskussionsschriften dp9808, Universitaet Bern, Departement Volkswirtschaft.
  4. Wolfgang Pesendorfer & Asher Wolinsky, 2000. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Discussion Papers 1306, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Asher Wolinsky, 1991. "Competition in a Market for Informed Experts' Services," Discussion Papers 959, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. 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.
  7. 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.
  8. 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.
  9. Kai Sülzle & Achim Wambach, 2002. "Insurance in a Market for Credence Goods," CESifo Working Paper Series 677, CESifo Group Munich.
  10. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
  11. 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.
  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. 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.
  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. Liu, Ting, 2006. "Credence Goods Markets with Conscientious and Selfish Experts," MPRA Paper 1106, University Library of Munich, Germany.
  16. 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.
  17. 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.
  18. 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.
  19. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society.
  20. 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.
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Citations

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Cited by:
  1. Olivier Bonroy & Stéphane Lemarié & Jean-Philippe Tropeano, 2013. "Credence goods, experts and risk aversion," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00976890, HAL.
  2. 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.
  3. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation 12/282, Department of Economics, University of Bristol, UK.
  4. Alexander Frankel & Michael Schwarz, 2009. "Experts and Their Records," NBER Working Papers 14921, National Bureau of Economic Research, Inc.
  5. 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.
  6. repec:hal:cesptp:hal-00976890 is not listed on IDEAS

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