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Competition Fosters Trust

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Author Info
Steffen Huck (Department of Economics, University College London)
Gabriele K. Ruchala (Department of Economics, University of Erfurt)
Jean-Robert Tyran (Department of Economics, University of Copenhagen)

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Abstract

We study the effects of reputation and competition in a stylized market for experience goods. If interaction is anonymous, such markets perform poorly: sellers are not trustworthy, and buyers do not trust sellers. If sellers are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting buyers access to all sellers’ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 06-22.

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Length: 18 pages
Date of creation: Nov 2006
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Handle: RePEc:kud:kuiedp:0622

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Related research
Keywords: experience goods competition reputation trust moral hazard information conditions

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steffen Huck & Gabriele K. Ruchala & Jean-Robert Tyran, 2007. "Pricing and Trust," Discussion Papers 07-04, University of Copenhagen. Department of Economics. [Downloadable!]
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