Quality Ambiguity and the Market Mechanism for Credence Goods

With credence goods consumers cannot judge actual quality neither before purchase (ex ante) nor after purchase (ex post). Trust has to replace own examination and verification. Applying Choquet-Expected Utility theory, ageneral model of credence goods is developed wich takes the problem of trust explicitly in its view and generalizes the problem of quality uncertainty on the 'market for lemmons' of Akerlof (1970) to 'quality ambiguity' with credence goods. The model shows the market mechanism only performing well in providing credence goods when consumers' trust in given information is not too low. With trust too low, sellers of credence good will be driven out of the market by trust induced adverse selection. In market equilibrium prices will always be lower compared to equilibrium prices for experience goods.


Issue Date:
2004-08
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
ISSN 1615 - 0473 (Other)
PURL Identifier:
http://purl.umn.edu/98639
Total Pages:
46
JEL Codes:
C72; D81; D82
Series Statement:
Hohenheimer Agrarökonomische Arbeitsberichte
9




 Record created 2017-04-01, last modified 2017-08-25

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