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Controlling Sellers Who Provide Advice: Regulation and Competition

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  • Bardey, David
  • Gromb, Denis
  • Martimort, David
  • Pouyet, Jérôme

Abstract

A monopoly seller advises buyers about which of two goods best fits their needs but may be tempted to steer buyers towards the higher margin good. For the seller to collect information about a buyer's needs and provide truthful advice, the profits from selling both goods must lie within an implementability cone. In the optimal regulation, pricing distortions and information-collection incentives are controlled separately by price regulation and fixed rewards respectively. This no longer holds when the seller has private information about costs as both problems interact. We study the extent to which competition and the threat by buyers to switch sellers can substitute for regulation.

Suggested Citation

  • Bardey, David & Gromb, Denis & Martimort, David & Pouyet, Jérôme, 2019. "Controlling Sellers Who Provide Advice: Regulation and Competition," CEPR Discussion Papers 13543, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13543
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    References listed on IDEAS

    as
    1. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    2. Antoine Faure‐Grimaud & Eloïc Peyrache & Lucía Quesada, 2009. "The ownership of ratings," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 234-257, June.
    3. 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.
    4. Dubois, Pierre & Sæthre, Morten, 2017. "On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector," Discussion Paper Series in Economics 3/2018, Norwegian School of Economics, Department of Economics.
    5. Dulleck, Uwe & Kerschbamer, Rudolf, 2009. "Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 15-23, January.
    6. Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.
    7. Marie Allard & Pierre Thomas Léger & Lise Rochaix, 2009. "Provider Competition in a Dynamic Setting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(2), pages 457-486, June.
    8. Ingela Alger & François Salanié, 2006. "A Theory of Fraud and Overtreatment in Experts Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 853-881, December.
    9. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    asymmetric information; Expertise; Mis-Selling; regulation;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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