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Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need

Author

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  • Kerschbamer, Rudolf
  • Dulleck, Uwe

Abstract

This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer's problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market.

Suggested Citation

  • Kerschbamer, Rudolf & Dulleck, Uwe, 2005. "Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need," CEPR Discussion Papers 5242, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5242
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    References listed on IDEAS

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    9. Kai Sülzle & Achim Wambach, 2005. "Insurance in a Market for Credence Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(1), pages 159-176, March.
    10. Dulleck, Uwe & Kerschbamer, Rudolf, 2001. "On Doctors, Mechanics and Computer Specialists. Or Where are the Problems with Credence Goods?," CEPR Discussion Papers 3016, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Rudolf Kerschbamer & Matthias Sutter & Uwe Dulleck, 2009. "The Impact of Distributional Preferences on (Experimental) Markets for Expert Services," Working Papers 2009-28, Faculty of Economics and Statistics, Universität Innsbruck.
    2. 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.

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    More about this item

    Keywords

    Experts; Discounters; Credence goods; Vertical restraints;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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