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Can Minimum Prices Assure the Quality of Professional Services?

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  • Georg Meran
  • Reimund Schwarze

Abstract

This papers studies the effects on service quality and consumer surplus of a minimum price which is fixed by a bureaucratic non-monopolistic professional association. It shows that the price floor set by a Niskanen-type professional assocation will maximize consumer surplus only if consumers demand the highest possible average quality. If consumers demand services of lesser quality, the association's price floor will be too high if measured by consumer surplus. Moreover we show that a de-regulated market will always reproduce the favorable result of a uniformly high price in the case of top quality demand while delivering superior results in the case of a mixed demand for high and low quality services. The general picture that emerges from this discussion is that the current EU Commission's initiative to abolish fixed price schemes for professional services will not lead to a decrease in quality that would be undesirable from a standpoint of consumer protection. This holds even if we acknowledge the opponent's claim that there is a chance of deprivation of professional ethics due to price competition.

Suggested Citation

  • Georg Meran & Reimund Schwarze, 2005. "Can Minimum Prices Assure the Quality of Professional Services?," Discussion Papers of DIW Berlin 531, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp531
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    References listed on IDEAS

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    1. Morris M. Kleiner, 2000. "Occupational Licensing," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 189-202, Fall.
    2. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
    3. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.
    4. Matthews, Robin C O, 1991. "The Economics of Professional Ethics: Should the Professions Be More Like Business?," Economic Journal, Royal Economic Society, vol. 101(407), pages 737-750, July.
    5. Maurizi, Alex, 1974. "Occupational Licensing and the Public Interest," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 399-413, Part I, M.
    6. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
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    13. Morton I. Kamien & Daniel R. Vincent, 1991. "Price Regulation and Quality of Service," Discussion Papers 920, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    Cited by:

    1. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.

    More about this item

    Keywords

    Liberal professions; Price regulation; Quality; Professional association; Self-regulation; EU competition policy; Intrinsic motivation;

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

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