Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What They Need
36 Pages Posted: 24 Oct 2005
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: Suggested Citation
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