Doing Less for More: Consumer Search and Undertreatment in Credence Service Markets

In many service markets, expert providers possess an information advantage over consumers regarding the necessary services, creating opportunities for fraudulent practices. These may involve overtreatment through unnecessary services or undertreatment with ineffective solutions that fail to address consumers' problems. When issues are resolved, consumers exit the market; when unresolved, they must decide whether to revisit the initial provider or seek a new one. Little is known about how repeated interactions and the consumer search process influence expert fraud and consumer welfare in such markets. We develop a dynamic game-theoretic model to examine the role of consumer search behavior and repeated interactions between consumers and service providers. We find that overtreatment and undertreatment can arise simultaneously in equilibrium. Interestingly, undertreatment-being less costly for the consumer-can initially act as a "hook" to induce acceptance of a minor treatment recommendation. When this minor treatment fails to resolve the issue, it can generate additional demand for a more expensive and serious treatment. This would arise when the cost of revisiting the initial provider is lower than that of searching for a new one. The extent of undertreatment exhibits a non-monotonic relationship with consumers' ex ante belief about the nature of their problems and the market's ethical level. Our results can shed light on how market ethical levels, provider capabilities and capacities, and consumer privacy protection policies interact with undertreatment and affect consumer welfare. Specifically, consumer welfare can decrease as the market becomes more ethical. Enhancing providers' diagnostic capabilities and capacities can exacerbate undertreatment. Providing access to consumers' diagnosis histories can help mitigate the undertreatment issue and improve consumer welfare.