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Second Opinions and Price Competition Inefficiency in the Market for Expert Advice

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Author Info
Wolfgang Pesendorfer
Asher Wolinsky

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Abstract

We analyze a market where the consumer must rely on expers to identify the correct type of service. Medical services, repair services and various types of consulting and advisory services belong to this broad category. Our focus is on situations where the diagnosis of the consumer's needs is costly and the expert's effort is unobservable. We develop a model where experts offer competing contracts and consumers may gather multiple opinions. In various contractual settings, we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort. We find that there is a tension between price competition and quality of the advise provided in equilibrium. Under all the contracting scenarios considered, the equilibrium fails to realize the second best welfare optimum. In some of the cases, no gains from trade are realized. On the other hand, limiting price competition via price control increases total welfare.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1229.

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Date of creation: May 1998
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Handle: RePEc:nwu:cmsems:1229

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References listed on IDEAS
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. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
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  2. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 647-58, October. [Downloadable!] (restricted)
  3. Jacob Glazer & Thomas G. McGuire, 1991. "The Economics of Referrals," Papers 0020, Boston University - Industry Studies Programme.
  4. Wolfgang Pesendorfer & Asher Wolinsky, 1998. "Second Opinions and Price Competition Inefficiency in the Market for Expert Advice," Discussion Papers 1229, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  5. 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. [Downloadable!] (restricted)
  6. Asher Wolinsky, 1993. "Competition in a Market for Informed Experts' Services," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 380-398, Autumn. [Downloadable!] (restricted)
  7. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  8. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
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(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. CRÉMER, Jacques & SPIEGEL, Yossi & ZHENG, Charles, 2005. "Optimal Search Auctions," IDEI Working Papers 293, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  2. Dulleck, Uwe & Kerschbamer, Rudolf, 2003. "Price Discrimination in Markets for Experts' Services," CEPR Discussion Papers 4155, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. Priyodorshi Banerjee, 2007. "Price Interventions in a Cournot Oligopoly with a Dominant Firm," Topics in Theoretical Economics, Berkeley Electronic Press, vol. 7(1), pages 1348-1348. [Downloadable!] (restricted)
  5. In-Uck Park, 2000. "Cheap Talk Reputation and Coordination of Differentiated Experts," Econometric Society World Congress 2000 Contributed Papers 1680, Econometric Society. [Downloadable!]
  6. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2004. "Conflicts of Interest, Information Provision and Competition in Banking," Economics Working Papers 760, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  7. Uwe Dulleck & Rudolf Kerschbamer, 2005. "Price discrimination via the choice of distribution channels," Economics working papers 2005-08, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
  8. Uwe Dulleck & Rudolf Kerschbamer, 2005. "Experts vs. discounters: consumer free riding and experts withholding advice in markets for credence goods," Economics working papers 2005-09, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
    Other versions:
  9. 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. [Downloadable!] (restricted)
  10. Cremer, Jaques & Spiegel, Yossi & Zheng, Charles, 2006. "Optimal Search Auctions," Staff General Research Papers 12662, Iowa State University, Department of Economics.
  11. 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.
    Other versions:
  12. Joel Shapiro & Patrick Bolton & Xavier Freixas, 2004. "Conflicts of Interest and Credible Information Provision by Specialized and One-Stop Banks," Econometric Society 2004 North American Winter Meetings 132, Econometric Society. [Downloadable!]
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