Holding private quality information: implications for unethical practices and social welfare in credence goods markets

We investigate how a provider’s private quality information influences the adoption of pricing strategies, with implications for the occurrence of unethical practices and social welfare. Specifically, we consider a market where a provider caters to consumers with various needs. Consumers are uncertain about the intensity of their needs or the provider’s quality. The provider employs either uniform pricing or non-uniform pricing for various service types. After discerning a consumer’s need, the provider may refuse to treat the consumer (termed as consumer dumping) or recommend a service, in which case the provider may recommend a serious service to a consumer with a minor need but perform a minor service (termed as overcharging). The consumer accepts service only when perceiving its value to exceed the price. We demonstrate that the provider signals (conceals) quality with a quality-dependent (quality-invariant) menu when the provider’s likelihood of offering high-quality service is low (high). Depending on cost structure and consumer composition, the provider may dump consumers under uniform pricing or overcharge consumers under non-uniform pricing. Quality revelation eliminates unethical behavior, while it may benefit the provider but has no consequential effects on consumers as a whole. It is noteworthy that even imperfect quality revelation, which is subject to biases in quality disclosure, can improve the profit of the provider and enhance social welfare. Moreover, we alert regulators to market conditions when imposing price caps, as imprudent regulations may drive the market into disorder and incubate unethical behavior.