Working Paper: CEPR ID: DP6135
Authors: Steffen Huck; Gabriele K. Ruchala; Jean-Robert Tyran
Abstract: We experimentally examine the effects of flexible and fixed prices in markets for experience goods in which demand is driven by trust. With flexible prices, we observe low prices and high quality in competitive (oligopolistic) markets, and high prices coupled with low quality in non-competitive (monopolistic) markets. We then introduce a regulated intermediate price above the oligopoly price and below the monopoly price. The effect in monopolies is more or less in line with standard intuition. As price falls volume increases and so does quality, such that overall efficiency is raised by 50%. However, quite in contrast to standard intuition, we also observe an efficiency rise in response to regulation in oligopolies. Both, transaction volume and traded quality are, in fact, maximal in regulated oligopolies.
Keywords: experience goods; markets; moral hazard; price competition; reputation; trust
JEL Codes: C72; C90; D40; D80; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower regulated price (L51) | increase in demand (J23) |
| increase in demand (J23) | enhance quality of goods (L15) |
| lower regulated price (L51) | enhance quality of goods (L15) |
| regulated price (D41) | increased buyer selectivity (F61) |
| increased buyer selectivity (F61) | enhance trustworthiness among sellers (L14) |
| enhance trustworthiness among sellers (L14) | increase overall market efficiency (G14) |
| regulated price (D41) | increase trust and quality in oligopolistic markets (L15) |
| regulated oligopoly (L13) | most efficient market structure (D41) |
| price regulation (L51) | decrease in lemons in oligopolies (D43) |