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Competition in Markets for Credence Goods

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  • Asher Wolinsky

Abstract

This paper investigates the functioning of markets for credence goods. These are markets in which the information asymmetries are of the form that sellers are also experts who determine customers' needs. It examines the role of customers' search for multiple opinions in disciplining experts. It characterizes the equilibrium amount of fraud in such markets and shows that, despite intense competition, the information asymmetry will be translated into a mark-up over cost embodied in the prices of the less expensive services. It points out that the equilbrium does not maximize the expected customers' surplus, even subject to the informational constraints regarding the experts' superior information.

Suggested Citation

  • Asher Wolinsky, 1994. "Competition in Markets for Credence Goods," Discussion Papers 1099, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1099
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    References listed on IDEAS

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    1. Jacob Glazer & Thomas G. McGuire, 1991. "The Economics of Referrals," Papers 0020, Boston University - Industry Studies Programme.
    2. 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.
    3. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    4. 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.
    5. Pitchik, Carolyn & Schotter, Andrew, 1988. "Honesty in a Model of Strategic Information Transmission: Correction," American Economic Review, American Economic Association, vol. 78(5), pages 1164-1164, December.
    6. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
    7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
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    Cited by:

    1. Uwe Dulleck & Rudolf Kerschbamer, 2001. "On Doctors, Mechanics and Computer Specialists Or Where are the Problems with Credence Goods?," Vienna Economics Papers vie0101, University of Vienna, Department of Economics.

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