Competition in Markets for Credence Goods
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.
|Date of creation:||Jul 1994|
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|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
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- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- Asher Wolinsky, 1993.
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- Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
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- Jacob Glazer & Thomas G. McGuire, 1991. "The Economics of Referrals," Papers 0020, Boston University - Industry Studies Programme.
- 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.
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