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

Rudolf Kerschbamer and Uwe Dulleck

No 5242, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: D40 D82 L15 (search for similar items in EconPapers)
Date: 2005-09
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (5)

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