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The Advertising of Credence Goods as a Signal of Product Quality

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  • Sunku Hahn

Abstract

The advertising of credence goods is analysed in a similar way to the way Milgrom and Roberts analysed the advertising of experience goods. The existing literature on credence goods has not considered the possibility that some consumers have the expertise to assess the product's quality and the possibility that the producer can advertise. I assume these two points and show that there exists a unique equilibrium that survives the ‘intuitive criterion’. Also, it is shown that through encouraging producers to accept new technologies advertising may increase social welfare instead of just being a pure social cost.

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  • Sunku Hahn, 2004. "The Advertising of Credence Goods as a Signal of Product Quality," Manchester School, University of Manchester, vol. 72(1), pages 50-59, January.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:1:p:50-59
    DOI: 10.1111/j.1467-9957.2004.00379.x
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    References listed on IDEAS

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    1. 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.
    2. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
    3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    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, October.
    5. Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 773-789.
    6. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    7. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
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    Cited by:

    1. Nathan Berg & Jeong‐Yoo Kim & Ilgyun Seon, 2021. "A performance‐based payment: Signaling the quality of a credence good," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1117-1131, July.

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