Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What They Need

36 Pages Posted: 24 Oct 2005

See all articles by Uwe Dulleck

Uwe Dulleck

University of Vienna - Department of Economics

Rudolf Kerschbamer

University of Innsbruck; Centre for Economic Policy Research (CEPR)

Date Written: September 2005

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: Experts, discounters, credence goods, vertical restraints

JEL Classification: D40, D82, L15

Suggested Citation

Dulleck, Uwe and Kerschbamer, Rudolf, Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What They Need (September 2005). CEPR Discussion Paper No. 5242, Available at SSRN: https://ssrn.com/abstract=834606

Uwe Dulleck

University of Vienna - Department of Economics ( email )

Bruennerstrasse 72
Vienna, A-1210
Austria
+43 1 4277 374 ext. 27 (Phone)
+43 1 4277 9374 (Fax)

Rudolf Kerschbamer (Contact Author)

University of Innsbruck ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria
+43 512 507 7400 (Phone)
+43 512 507 2980 (Fax)

HOME PAGE: http://www.uibk.ac.at/c/c4/c409/staff/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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