IDEAS home Printed from https://ideas.repec.org/p/jku/econwp/2005_09.html
   My bibliography  Save this paper

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

Author

Listed:

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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://www.econ.jku.at/papers/2005/wp0509.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    3. 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.
    4. Uwe Dulleck, 2000. "Where Are The Problems with Credence Goods?," Econometric Society World Congress 2000 Contributed Papers 1441, Econometric Society.
    5. 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.
    6. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
    7. 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.
    8. 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.
    9. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 417-437.
    10. Bouckaert, Jan & Degryse, Hans, 2000. "Price competition between an expert and a non-expert," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 901-923, August.
    11. Asher Wolinsky, 1993. "Competition in a Market for Informed Experts' Services," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 380-398, Autumn.
    12. Howard P. Marvel & Stephen McCafferty, 1984. "Resale Price Maintenance and Quality Certification," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 346-359, Autumn.
    13. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-297, October.
    14. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 53-74, February.
    15. Pitchik, Carolyn & Schotter, Andrew, 1987. "Honesty in a Model of Strategic Information Transmission," American Economic Review, American Economic Association, vol. 77(5), pages 1032-1036, December.
    16. Patrick Bolton & Giacomo Bonanno, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 555-570.
    17. 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.
    18. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
    19. Kala Krishna & Tor Winston, 2003. "If at First You Don't Succeed: Profits, Prices, and Market Structure in a Model of Quality with Unknowable Consumer Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 573-597, May.
    20. Perry, Martin K & Besanko, David, 1991. "Resale Price Maintenance and Manufacturer Competition for Exclusive Dealerships," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 517-544, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Bester, Helmut & Ouyang, Yaofu, 2018. "Optimal procurement of a credence good under limited liability," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 96-129.
    3. Helmut Bester & Matthias Dahm, 2018. "Credence Goods, Costly Diagnosis and Subjective Evaluation," Economic Journal, Royal Economic Society, vol. 128(611), pages 1367-1394, June.
    4. Hyndman, Kyle & Ozerturk, Saltuk, 2011. "Consumer information in a market for expert services," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 628-640.
    5. 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.
    6. Vincze, János, 2010. "Miért és mitől védjük a fogyasztókat?. Aszimmetrikus információ és/vagy korlátozott racionalitás [Asymmetric information and/or bounded rationality: why are consumers protected and from what?]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 725-752.
    7. Uwe Dulleck & Rudolf Kerschbamer, 2005. "Price discrimination via the choice of distribution channels," Economics working papers 2005-08, Department of Economics, Johannes Kepler University Linz, Austria.
    8. Fang Liu & Alexander Rasch & Marco A. Schwarz & Christian Waibel, 2020. "The role of diagnostic ability in markets for expert services," Working Papers 2020-07, Faculty of Economics and Statistics, University of Innsbruck.
    9. 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.
    10. Martin Obradovits & Philipp Plaickner, 2020. "Searching for Treatment," Working Papers 2020-18, Faculty of Economics and Statistics, University of Innsbruck.
    11. Dulleck, Uwe & Kerschbamer, Rudolf & Konovalov, Alexander, 2014. "Too Much or Too Little? Price-Discrimination in a Market for Credence Goods," Working Papers in Economics 582, University of Gothenburg, Department of Economics, revised Apr 2014.
    12. 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.
    13. Ouyang, Yaofu, 2016. "Credence Goods, Risk Averse, and Optimal Insurance," MPRA Paper 70392, University Library of Munich, Germany.
    14. 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, University of Innsbruck.
    15. Joachim Heinzel, 2019. "Credence Goods Markets with Fair and Opportunistic Experts," Working Papers CIE 119, Paderborn University, CIE Center for International Economics.
    16. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2004. "Conflicts of interest, information provision and competition in banking," Economics Working Papers 760, Department of Economics and Business, Universitat Pompeu Fabra.
    17. Jost, Peter-J. & Reik, Steffen & Ressi, Anna, 2019. "Information in a Monopolist's Credence Good Market," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203555, Verein für Socialpolitik / German Economic Association.
    18. Uwe Dulleck & Rudolf Kerschbamer, 2003. "Price Discrimination in Markets for Experts´ Services," Vienna Economics Papers 0312, University of Vienna, Department of Economics.
    19. 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.
    20. Laurens G. Debo & L. Beril Toktay & Luk N. Van Wassenhove, 2008. "Queuing for Expert Services," Management Science, INFORMS, vol. 54(8), pages 1497-1512, August.

    More about this item

    Keywords

    Experts; Discounters; Credence Goods; Vertical Restraints;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jku:econwp:2005_09. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (René Böheim). General contact details of provider: https://edirc.repec.org/data/vlinzat.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.