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Experts vs. Discounters: Consumer Free Riding and Experts Withholding Advice in Markets for Credence Goods

Author

Listed:
  • Uwe Dulleck
  • Rudolf Kerschbamer
Abstract
This paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable, and if they face competition by discounters who are not able to perform a diagnosis. The unobservability of diagnosis effort and the credence characteristic of the good induces experts to choose incentive compatible tariff structures. This makes them vulnerable to competition by discounters. We explore the conditions under which honestly diagnosing experts survive competition by discounters; we identify situations in which experts misdiagnose consumers in order to prevent them from free riding on experts' advice; and we discuss policy options to solve the free-rider problem.

Suggested Citation

  • Uwe Dulleck & Rudolf Kerschbamer, 2007. "Experts vs. Discounters: Consumer Free Riding and Experts Withholding Advice in Markets for Credence Goods," Working Papers 2007-21, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2007-21
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    References listed on IDEAS

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    More about this item

    Keywords

    Experts; Discounters; Credence Goods; Advice; Free Riding;
    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

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