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Quality Ambiguity and the Market Mechanism for Credence Goods

  • Benner, Dietrich
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    With credence goods consumers cannot judge actual quality neither before purchase (ex ante) nor after purchase (ex post). Trust has to replace own examination and verification. Applying Choquet-Expected Utility theory, ageneral model of credence goods is developed wich takes the problem of trust explicitly in its view and generalizes the problem of quality uncertainty on the 'market for lemmons' of Akerlof (1970) to 'quality ambiguity' with credence goods. The model shows the market mechanism only performing well in providing credence goods when consumers' trust in given information is not too low. With trust too low, sellers of credence good will be driven out of the market by trust induced adverse selection. In market equilibrium prices will always be lower compared to equilibrium prices for experience goods.

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    Paper provided by Universitaet Hohenheim, Institute of Agricultural Policy and Agricultural Markets in its series Working Papers with number 98639.

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    Date of creation: Aug 2004
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    Handle: RePEc:ags:uhgewp:98639
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    8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    9. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
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    13. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
    14. Eichberger, J. & Kelsey, D., 1994. "Non-additive beliefs and game theory," Discussion Paper 1994-10, Tilburg University, Center for Economic Research.
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