Controlling Sellers Who Provide Advice: Regulation and Competition

60 Pages Posted: 25 Feb 2019

See all articles by David Bardey

David Bardey

Universidad de los Andes, Colombia - Department of Economics

Denis Gromb

HEC Paris

David Martimort

Paris School of Economics (PSE)

Jerome Pouyet

ESSEC Business School

Date Written: February 2019

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: asymmetric information, Expertise, Mis-Selling, regulation

JEL Classification: D82, G24, I11, L13, L15, L51

Suggested Citation

Bardey, David and Gromb, Denis and Martimort, David and Pouyet, Jerome, Controlling Sellers Who Provide Advice: Regulation and Competition (February 2019). CEPR Discussion Paper No. DP13543, Available at SSRN: https://ssrn.com/abstract=3341350

David Bardey (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Denis Gromb

HEC Paris

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

David Martimort

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Jerome Pouyet

ESSEC Business School

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