Working Paper: CEPR ID: DP13543
Authors: Jerome Pouyet; David Martimort; Denis Gromb; David Bardey
Abstract: A monopoly seller advises buyers about which of two goods best fits their needs but may be tempted to steer buyers towards the higher margin good. For the seller to collect information about a buyer's needs and provide truthful advice, the profits from selling both goods must lie within an implementability cone. In the optimal regulation, pricing distortions and information-collection incentives are controlled separately by price regulation and fixed rewards respectively. This no longer holds when the seller has private information about costs as both problems interact. We study the extent to which competition and the threat by buyers to switch sellers can substitute for regulation.
Keywords: Misselling; Expertise; Regulation; Asymmetric Information
JEL Codes: D82; I11; L13; L15; L51; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Seller's incentives to provide truthful advice (D82) | Quality of advice (L15) |
| Profits from selling goods lying within an implementability cone (D22) | Seller's incentives to provide truthful advice (D82) |
| Seller's profits lying outside the implementability cone (D22) | Quality of advice (L15) |
| Regulation (L51) | Seller's incentives to provide advice (G24) |
| Competition and threat of switching sellers (D43) | Seller performance (L85) |
| Buyer control through retrospective rules (L14) | Seller's incentives to provide advice (G24) |
| Regulation (L51) | Pricing distortions (D49) |
| Moral hazard and adverse selection (D82) | Inefficiencies (D61) |