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The information paradox in a monopolist’s credence goods market

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  • Jost, Peter-J.
  • Reik, Steffen
  • Ressi, Anna

Abstract

Credence good markets, such as those for car repairs and medical treatments, are generally characterized by an ex-ante and ex-post information asymmetry between the uninformed customers and the informed expert. In this paper, we allow for both uninformed as well as informed customers to exist in a monopolist credence goods market. We analyze the implications of this kind of informational heterogeneity for the expert’s pricing decisions, incentives to commit fraud, as well as market efficiency and social welfare under different institutional arrangements. Most importantly, our approach enables us to evaluate endeavours to improve the level of customers’ information. Contrary to basic intuition, we find that recent developments and policy measures originally aimed at improving social welfare by increasing the level of information might actually backfire.

Suggested Citation

  • Jost, Peter-J. & Reik, Steffen & Ressi, Anna, 2021. "The information paradox in a monopolist’s credence goods market," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:indorg:v:75:y:2021:i:c:s016771872030117x
    DOI: 10.1016/j.ijindorg.2020.102694
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    References listed on IDEAS

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    1. Timothy J. Feddersen & Thomas W. Gilligan, 2001. "Saints and Markets: Activists and the Supply of Credence Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(1), pages 149-171, March.
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    6. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 417-437.
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    8. Yongmin Chen & Jianpei Li & Jin Zhang, 2022. "Efficient Liability In Expert Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1717-1744, November.
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    Cited by:

    1. Cao, Yiran & Chen, Yongmin & Ding, Yucheng & Zhang, Tianle, 2022. "Search and competition in expert markets," MPRA Paper 114170, University Library of Munich, Germany.
    2. Yongmin Chen & Jianpei Li & Jin Zhang, 2022. "Efficient Liability In Expert Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1717-1744, November.

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    More about this item

    Keywords

    Credence goods; Liability; Verifiability; Information improvements;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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