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

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Abstract

This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer’s problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market. We also discuss whether vertical restraints can alleviate these inefficiencies.

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Bibliographic Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2005-09.

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Date of creation: Sep 2005
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Handle: RePEc:jku:econwp:2005_09

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Keywords: Experts; Discounters; Credence Goods; Vertical Restraints;

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  1. W. Pesendorfer & A. Wolinsky, 2000. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Princeton Economic Theory Papers 00s18, Economics Department, Princeton University.
  2. 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.
  3. 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.
  4. Winand Emons, 1998. "Product Differentiation and Price Competition between a Safe and a Risky Seller," Diskussionsschriften dp9808, Universitaet Bern, Departement Volkswirtschaft.
  5. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
  6. 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.
  7. Liu, Ting, 2006. "Credence Goods Markets with Conscientious and Selfish Experts," MPRA Paper 1107, University Library of Munich, Germany, revised 10 Sep 0007.
  8. Kai Sülzle & Achim Wambach, 2002. "Insurance in a Market for Credence Goods," CESifo Working Paper Series 677, CESifo Group Munich.
  9. 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.
  10. Kala Krishna & Tor Winston, 2000. "If at First You Don't Succeed...: Profits, Prices and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity," NBER Working Papers 7494, National Bureau of Economic Research, Inc.
  11. 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.
  12. 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.
  13. 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.
  14. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
  15. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society.
  16. 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.
  17. 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.
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Cited by:
  1. 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.
  2. Olivier Bonroy & Stéphane Lemarié & Jean-Philippe Tropeano, 2013. "Credence goods, experts and risk aversion," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00976890, HAL.
  3. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
  4. Alexander Frankel & Michael Schwarz, 2009. "Experts and Their Records," NBER Working Papers 14921, National Bureau of Economic Research, Inc.
  5. Olivier Bonroy & Stéphane Lemarié & Jean-Philippe Tropeano, 2013. "Credence goods, experts and risk aversion," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00976890, HAL.
  6. 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.

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