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Experts vs. discounters: consumer free riding and experts withholding advice in markets for credence goods

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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. We also discuss whether vertical restraints can alleviate these inefficiencies.

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  • Uwe Dulleck & Rudolf Kerschbamer, 2005. "Experts vs. discounters: consumer free riding and experts withholding advice in markets for credence goods," Economics working papers 2005-09, Department of Economics, Johannes Kepler University Linz, Austria.
  • Handle: RePEc:jku:econwp:2005_09
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    1. Winand Emons, 2000. "Product Differentiation and Price Competition Between a Safe and a Risky Seller," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 156(3), pages 431-431, September.
    2. Ting Liu, 2011. "Credence Goods Markets With Conscientious And Selfish Experts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 227-244, February.
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    11. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
    12. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    13. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society.
    14. 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.
    15. Ingela Alger & Francois Salanie, 2001. "A Theory of Fraud and Over-Consumption in Experts Markets," Boston College Working Papers in Economics 495, Boston College Department of Economics, revised 09 Nov 2004.
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    19. Dulleck, Uwe & Kerschbamer, Rudolf, 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.
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    Cited by:

    1. Uwe Dulleck & Rudolf Kerschbamer & Alexander Konovalov, 2014. "Too much or too little? Price-discrimination in a market for credence goods," Working Papers 2014-13, Faculty of Economics and Statistics, University of Innsbruck.
    2. Uwe Dulleck & Jiong Gong & Jianpei Li, 2015. "Contracting for Infrastructure Projects as Credence Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(3), pages 328-345, June.
    3. Alexander Frankel & Michael Schwarz, 2009. "Experts and Their Records," NBER Working Papers 14921, National Bureau of Economic Research, Inc.
    4. Fong, Yuk-fai & Liu, Ting & Wright, Donald J., 2014. "On the role of verifiability and commitment in credence goods markets," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 118-129.
    5. David Bardey & Denis Gromb & David Martimort & Jérôme Pouyet, 2016. "Drugs, Showrooms and Financial Products: Competition and Regulation when Sellers Provide Expert Advice," PSE Working Papers halshs-01400841, HAL.
    6. Bonroy, Olivier & Lemarié, Stéphane & Tropéano, Jean-Philippe, 2013. "Credence goods, experts and risk aversion," Economics Letters, Elsevier, vol. 120(3), pages 464-467.
    7. Chen, Yongmin & Li, Jianpei & Zhang, Jin, 2017. "Liability in Markets for Credence Goods," MPRA Paper 80206, University Library of Munich, Germany.
    8. Helmut Bester & Matthias Dahm, 2014. "Credence Goods, Costly Diagnosis, and Subjective Evaluation," Discussion Papers 2014-13, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    9. repec:bla:jindec:v:65:y:2017:i:2:p:309-335 is not listed on IDEAS
    10. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, Elsevier.
    11. Saak, Alexander E., 2016. "Delegation of quality control in value chains:," IFPRI discussion papers 1526, International Food Policy Research Institute (IFPRI).
    12. Saak, Alexander E., 2016. "The Value of Delegated Quality Control and Market Size with an Application to Kyrgyzstan Dairy," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235707, Agricultural and Applied Economics Association.
    13. Ouyang, Yaofu, 2016. "Credence Goods, Risk Averse, and Optimal Insurance," MPRA Paper 70392, University Library of Munich, Germany.
    14. Schneider, Tim & Bizer, Kilian, 2017. "Expert qualification in markets for expert services: A Sisyphean Task?," Center for European, Governance and Economic Development Research Discussion Papers 323, University of Goettingen, Department of Economics.
    15. repec:hal:cesptp:hal-00976890 is not listed on IDEAS
    16. Schneider, Tim & Bizer, Kilian, 2017. "Effects of qualification in expert markets with price competition and endogenous verifiability," Center for European, Governance and Economic Development Research Discussion Papers 317, University of Goettingen, Department of Economics.
    17. Dominik Erharter, 2012. "Credence goods markets, distributional preferences and the role of institutions," Working Papers 2012-11, Faculty of Economics and Statistics, University of Innsbruck.
    18. Alexander Frankel & Michael Schwarz, 2014. "Experts And Their Records," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 56-71, January.
    19. Schneider, Tim & Bizer, Kilian, 2017. "Building trust by qualification in a market for expert services," Center for European, Governance and Economic Development Research Discussion Papers 309, University of Goettingen, Department of Economics.
    20. Li, Jianpei & Ouyang, Yaofu, 2016. "Expert Costs and the Role of Verifiability," MPRA Paper 74390, University Library of Munich, Germany.
    21. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2016. "Consumer information in a market for expert services: Experimental evidence," Center for European, Governance and Economic Development Research Discussion Papers 285, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Experts; Discounters; Credence Goods; Vertical Restraints;

    JEL classification:

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

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