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Competition in Markets for Credence Goods

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  • Asher Wolinsky

Abstract

This paper investigates the functioning of markets for credence goods. These are markets in which the information asymmetries are of the form that sellers are also experts who determine customers' needs. It examines the role of customers' search for multiple opinions in disciplining experts. It characterizes the equilibrium amount of fraud in such markets and shows that, despite intense competition, the information asymmetry will be translated into a mark-up over cost embodied in the prices of the less expensive services. It points out that the equilbrium does not maximize the expected customers' surplus, even subject to the informational constraints regarding the experts' superior information.

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File URL: http://www.kellogg.northwestern.edu/research/math/papers/1099.pdf
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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1099.

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Date of creation: Jul 1994
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Handle: RePEc:nwu:cmsems:1099

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  2. 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.
  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.
  4. 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.
  5. 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.
  6. Jacob Glazer & Thomas G. McGuire, 1991. "The Economics of Referrals," Papers 0020, Boston University - Industry Studies Programme.
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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Cited by:
  1. Dulleck, Uwe & Kerschbamer, Rudolf, 2001. "On Doctors, Mechanics and Computer Specialists. Or Where are the Problems with Credence Goods?," CEPR Discussion Papers 3016, C.E.P.R. Discussion Papers.

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