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Price competition and reputation in credence goods markets: Experimental evidence

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  • Mimra, Wanda
  • Rasch, Alexander
  • Waibel, Christian

Abstract

In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Because experts provide both the diagnosis and the treatment, there is opportunity for fraud. We experimentally investigate how the intensity of price competition and the level of customer information about past expert behavior influence experts' incentives to defraud their customers when experts can build up reputation. We show that the level of fraud is significantly higher under price competition than when prices are fixed, as the price decline under a competitive-price regime inhibits quality competition. More customer information does not necessarily reduce the level of fraud.

Suggested Citation

  • Mimra, Wanda & Rasch, Alexander & Waibel, Christian, 2016. "Price competition and reputation in credence goods markets: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 100(C), pages 337-352.
  • Handle: RePEc:eee:gamebe:v:100:y:2016:i:c:p:337-352
    DOI: 10.1016/j.geb.2016.09.012
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    References listed on IDEAS

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    6. Dulleck, Uwe & Johnston, David W. & Kerschbamer, Rudolf & Sutter, Matthias, 2012. "The Good, the Bad and the Naive: Do Fair Prices Signal Good Types or Do They Induce Good Behaviour?," IZA Discussion Papers 6491, Institute of Labor Economics (IZA).
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    8. Mimra, Wanda & Rasch, Alexander & Waibel, Christian, 2016. "Second opinions in markets for expert services: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 106-125.
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    Cited by:

    1. Huck, Steffen & Lünser, Gabriele & Spitzer, Florian & Tyran, Jean-Robert, 2016. "Medical insurance and free choice of physician shape patient overtreatment: A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 78-105.
    2. Gary E. Bolton & David J. Kusterer & Johannes Mans, 2015. "Inflated reputations: Uncertainty, leniency & moral wiggle room in trader feedback systems," Cologne Graduate School Working Paper Series 06-04, Cologne Graduate School in Management, Economics and Social Sciences, revised 29 Jul 2016.
    3. Bejarano, Hernán & Green, Ellen P. & Rassenti, Stephen, 2017. "Payment scheme self-selection in the credence goods market: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 396-403.
    4. Mimra, Wanda & Rasch, Alexander & Waibel, Christian, 2016. "Second opinions in markets for expert services: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 106-125.
    5. Kerschbamer, Rudolf & Neururer, Daniel & Gruber, Alexander, 2019. "Do altruists lie less?," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 560-579.
      • Rudolf Kerschbamer & Daniel Neururer & Alexander Gruber, 2017. "Do the altruists lie less?," Working Papers 2017-18, Faculty of Economics and Statistics, University of Innsbruck, revised 09 Nov 2017.
    6. Vera Angelova & Tobias Regner, 2016. "Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services," SFB 649 Discussion Papers SFB649DP2016-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. Manuel Munoz-Herrera & Ernesto Reuben, 2019. "Business culture: The role of personal and impersonal business relationships on market efficiency," Working Papers 20190027, New York University Abu Dhabi, Department of Social Science, revised Jun 2019.
    8. Angelova, Vera & Regner, Tobias, 2018. "Can a bonus overcome moral hazard? Experimental evidence from markets for expert services," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 362-378.
    9. Kerschbamer, Rudolf & Neururer, Daniel & Sutter, Matthias, 2019. "Credence Goods Markets and the Informational Value of New Media: A Natural Field Experiment," IZA Discussion Papers 12184, Institute of Labor Economics (IZA).
    10. repec:eee:gamebe:v:112:y:2018:i:c:p:49-66 is not listed on IDEAS
    11. Schneider, Tim & Bizer, Kilian, 2017. "Expert qualification in markets for expert services: A Sisyphean Task?," Center for European, Governance and Economic Development Research Discussion Papers 323, University of Goettingen, Department of Economics.
    12. Schneider, Tim & Bizer, Kilian, 2017. "Effects of qualification in expert markets with price competition and endogenous verifiability," Center for European, Governance and Economic Development Research Discussion Papers 317, University of Goettingen, Department of Economics.
    13. Schneider, Tim & Bizer, Kilian, 2017. "Building trust by qualification in a market for expert services," Center for European, Governance and Economic Development Research Discussion Papers 309, University of Goettingen, Department of Economics.
    14. Agrawal, Anjali & Green, Ellen P. & Lavergne, Lisa, 2019. "Gender effects in the credence goods market: An experimental study," Economics Letters, Elsevier, vol. 174(C), pages 195-199.
    15. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2016. "Consumer information in a market for expert services: Experimental evidence," Center for European, Governance and Economic Development Research Discussion Papers 285, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Credence good; Expert; Fraud; Price competition; Reputation; Overcharging; Undertreatment;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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