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Consumer Information in a Market for Expert Services

  • Kyle Hyndman

    ()

    (SMU)

  • Saltuk Ozerturk

    ()

    (SMU)

We analyze the implications of heterogeneously informed consumers in a market for expert services. Our main question is to investigate whether uninformed consumers are the most likely victims of expert cheating. We show that when consumers are heterogeneously informed on their true benefit from an expensive treatment, there is no equilibrium where the expert only cheats uninformed consumers. In fact, informed high-value consumers are the most frequent victims of cheating. Surprisingly, more information on the consumer side increases the inefficiency of the market outcome in terms of the foregone, but required, treatments. When some consumers receive noisy information signals on whether their problem is serious or minor, while others remain uninformed, in the unique equilibrium the expert is truthful to all types of consumers, regardless of their information status.

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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0801.

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Date of creation: Apr 2008
Date of revision:
Handle: RePEc:smu:ecowpa:0801
Contact details of provider: Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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  1. 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.
  2. 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.
  3. Winand Emons, 1994. "Credence Goods and Fraudulent Experts," Diskussionsschriften dp9402, Universitaet Bern, Departement Volkswirtschaft.
  4. Kris De Jaegher & Marc Jegers, 2001. "The physician-patient relationship as a game of strategic information transmission," Health Economics, John Wiley & Sons, Ltd., vol. 10(7), pages 651-668.
  5. Asher Wolinsky, 1991. "Competition in a Market for Informed Experts' Services," Discussion Papers 959, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Wolfgang Pesendorfer & Asher Wolinsky, 2000. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Discussion Papers 1306, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  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. 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.
  9. Dranove, David, 1988. "Demand Inducement and the Physician/Patient Relationship," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 281-98, April.
  10. Emons, Winand, 1997. "Credence Goods Monopolists," Berkeley Olin Program in Law & Economics, Working Paper Series qt9c5508x4, Berkeley Olin Program in Law & Economics.
  11. Pitchik, Carolyn & Schotter, Andrew, 1987. "Honesty in a Model of Strategic Information Transmission," American Economic Review, American Economic Association, vol. 77(5), pages 1032-36, December.
  12. 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.
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