Price Competition and Reputation in Credence Goods Markets: Experimental Evidence

CER-ETH – Center of Economic Research at ETH Zurich Working Paper No. 13/176

66 Pages Posted: 29 Mar 2013 Last revised: 29 Mar 2016

See all articles by Wanda Mimra

Wanda Mimra

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Alexander Rasch

University of Cologne

Christian Waibel

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: March 27, 2013

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

Suggested Citation

Mimra, Wanda and Rasch, Alexander and Waibel, Christian, Price Competition and Reputation in Credence Goods Markets: Experimental Evidence (March 27, 2013). CER-ETH – Center of Economic Research at ETH Zurich Working Paper No. 13/176. Available at SSRN: https://ssrn.com/abstract=2240349 or http://dx.doi.org/10.2139/ssrn.2240349

Wanda Mimra (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Alexander Rasch

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Christian Waibel

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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