Price Competition and Reputation in Credence Goods Markets: Experimental Evidence

Abstract

In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Because experts provide both the diagnosis and the treatment, there is opportunity for fraud. We experimentally investigate how the intensity of price competition and the level of customer information about past expert behavior influence experts' incentives to defraud their customers when experts can build up reputation. We show that the level of fraud is significantly higher under price competition than when prices are fixed, as the price decline under a competitive-price regime inhibits quality competition. More customer information does not necessarily reduce the level of fraud.

Keywords: Credence Good, Expert, Fraud, Price Competition, Reputation, Overcharging, Undertreatment

JEL Classification: D82, L15