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Consumer information in a market for expert services

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  • Hyndman, Kyle
  • Ozerturk, Saltuk

Abstract

We present a model of credence goods in which the consumers are heterogenous in terms of the valuation they place for getting a serious problem fixed. We introduce consumer information into this framework by assuming that, prior to visiting an expert, some consumers receive an information signal about whether they have a serious or a minor problem. We show that when the fraction of consumers with low willingness to pay is sufficiently high, the expert does not cheat any low valuation consumer regardless of their information status, but cheats the high valuation consumers: those high-valuation consumers with bad signals are the most frequent victims of cheating, whereas those with good signals are the least likely victims. When the fraction of consumers with low willingness to pay is below a certain threshold, however, the unique equilibrium involves no cheating.

Suggested Citation

  • Hyndman, Kyle & Ozerturk, Saltuk, 2011. "Consumer information in a market for expert services," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 628-640.
  • Handle: RePEc:eee:jeborg:v:80:y:2011:i:3:p:628-640 DOI: 10.1016/j.jebo.2011.06.004
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    References listed on IDEAS

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    1. 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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    3. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
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    5. Yuk-fai Fong, 2005. "When Do Experts Cheat and Whom Do They Target?," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 113-130, Spring.
    6. Ingela Alger & Francois Salanie, 2001. "A Theory of Fraud and Over-Consumption in Experts Markets," Boston College Working Papers in Economics 495, Boston College Department of Economics, revised 09 Nov 2004.
    7. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 417-437.
    8. 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.
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    Cited by:

    1. Ouyang, Yaofu, 2016. "Credence Goods, Risk Averse, and Optimal Insurance," MPRA Paper 70392, University Library of Munich, Germany.
    2. 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.
    3. 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.

    More about this item

    Keywords

    Credence goods; Expert cheating; Consumer information;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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