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Consumer Uncertainty about which Firm Sells the High Quality: on the Slow Penetration of Some Credence Goods

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  • Bonroy, Olivier
  • Constantatos, Christos

Abstract

In this paper, we analyze cases where consumers are aware of the existence of two qualities but do not know which firm sells the good one. We show that if the production of the high quality requires higher cost, its producer may be severly disadvantaged, even if the additional utility fully justifies the extra cost. We even show cases where all consumers beliefs are in favour of the efficient high quality producer, yet it is its inefficient rival that monopolizes the market! This result explains the slow penetration of some credence goods like environementally friendly products, organic vegetables, etc. It also makes an urgent call for labelling this kind of products.

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Bibliographic Info

Paper provided by GREEN in its series Cahiers de recherche with number 0307.

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Date of creation: 2003
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Handle: RePEc:lvl:lagrcr:0307

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Keywords: Incomplete information; quality; asymetric costs;

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  1. Jean J. Gabszewicz & Isabel Grilo, 1992. "Price Competition When Consumersare Uncertain About Which Firm Sells Which Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 629-650, December.
  2. 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.
  3. 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.
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