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On Doctors, Mechanics and Computer Specialists Or Where are the Problems with Credence Goods?

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Abstract

With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The variety of results has fostered the impression that the equilibrium behavior of experts and consumers in the credence goods market sensitively depends on the details of the models. More disturbingly, apparently similar models often lead to contradicting results. The present paper shows that the results for the majority of the specific models can be reproduced in a very simple unifying framework. Our model is constructed so that an efficient solution is reached if a small number of critical assumptions is satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. Thus, our simple unifying model not only permits a clearer discrimination between situations in which market institutions solve the fraudulent expert problem without any cost and those where they do not; it also helps to identify the forces driving the various inefficiency results in the literature. Existing results are generalized, some previous interpretations of the forces leading to the striking differences in outcomes are questioned, and a new source for inefficiencies is identified.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0101.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0101.

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Date of creation: Jan 2001
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Handle: RePEc:vie:viennp:0101

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Web page: http://www.univie.ac.at/vwl

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  1. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
  2. 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.
  3. Wolfgang Pesendorfer & Asher Wolinsky, 2000. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Discussion Papers 1306, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  5. Asher Wolinsky, 1994. "Competition in Markets for Credence Goods," Discussion Papers 1099, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  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. 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.
  8. Carolyn Pitchik & Andrew Schotter, 1993. "Information Transmission in Regulated Markets," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 815-29, November.
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Cited by:
  1. Anna Merino, 2003. "Demand for pharmaceutical drugs: A choice modelling experiment," Working Papers, Research Center on Health and Economics 704, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Thomas Liebi, 2002. "Trusting Labels: A Matter of Numbers?," Diskussionsschriften dp0201, Universitaet Bern, Departement Volkswirtschaft.
  3. Dulleck, Uwe & Kerschbamer, Rudolf, 2003. "Price Discrimination in Markets for Experts' Services," CEPR Discussion Papers 4155, C.E.P.R. Discussion Papers.
  4. Anna Merino, 2003. "Demand for pharmaceutical drugs: A choice modelling experiment," Economics Working Papers 704, Department of Economics and Business, Universitat Pompeu Fabra.

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