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Credence Goods, Consumer Misinformation, and Quality

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  • Soham Baksi

    ()

  • Pinaki Bose
  • Di Xiang

Abstract

For certain products, consumers' misinformation about quality is more endemic at intermediate levels of the quality spectrum rather than at the top or the bottom levels of quality. Using an oligopoly model of vertical product differentiation with three quality levels - green, natural, and brown - we examine the consequences of consumers' overestimation of the quality of the natural (i.e. intermediate quality) product. There are three firms in the market, with each type of firm producing the corresponding type of the product. The firms choose the quality level of their product before choosing its price (Bertrand case) or quantity (Cournot case). Irrespective of the nature of second stage competition, we find that quality overestimation by consumers increases profit of the natural firm, and motivates it to raise its product’s quality. In response, the green firm improves its quality even further, but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when firms compete in prices but falls when they compete in quantities.

Suggested Citation

  • Soham Baksi & Pinaki Bose & Di Xiang, 2012. "Credence Goods, Consumer Misinformation, and Quality," Departmental Working Papers 2012-01, The University of Winnipeg, Department of Economics.
  • Handle: RePEc:win:winwop:2012-01
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    File URL: http://economics.uwinnipeg.ca/RePEc/winwop/2012-01.pdf
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    References listed on IDEAS

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    1. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
    2. Glaeser, Edward L. & Ujhelyi, Gergely, 2010. "Regulating misinformation," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 247-257, April.
    3. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
    4. Goss, Jody & Holcomb, Rodney B. & Ward, Clement E., 2002. "Factors Influencing Consumer Decisions Related To "Natural" Beef In The Southern Plains," Journal of Food Distribution Research, Food Distribution Research Society, vol. 33(01), March.
    5. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
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    1. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0024-4 is not listed on IDEAS

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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