A Theory of Fraud and Overtreatment in Experts Markets

Ingela Alger and François Salanié

Journal of Economics & Management Strategy, 2006, vol. 15, issue 4, 853-881

Abstract: Consumers often rely on an expert's diagnosis to assess their needs. If the expert is also the seller of services, he may use his informational advantage to induce overtreatment, which is a pervasive phenomenon in experts markets. We offer and discuss conditions leading to equilibrium overtreatment in an otherwise purely competitive model. This market failure results from consumers' ability to turn down an expert's recommendation: experts defraud consumers to keep them uninformed, as this deters them from seeking a better price elsewhere.

Date: 2006
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https://doi.org/10.1111/j.1530-9134.2006.00120.x

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