Working Paper: CEPR ID: DP5242
Authors: Uwe Dulleck; Rudolf Kerschbamer
Abstract: This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer's problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market.
Keywords: credence goods; discounters; experts; vertical restraints
JEL Codes: D40; D82; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unobservable diagnosis effort (C59) | Increased consumer free-riding (H40) |
| Increased consumer free-riding (H40) | Experts stop investing in diagnosis (G11) |
| Experts stop investing in diagnosis (G11) | Market shifts to discounters (L81) |
| Competition from discounters (L42) | Experts increase markup on minor interventions to cover diagnosis costs (I11) |
| Experts increase markup on minor interventions to cover diagnosis costs (I11) | Potential for adverse selection and inefficiency in the market (D82) |