Trust Building in Credence Goods Markets
Ting Liu*, Yuk-fai Fong, Xiaoxuan Meng
Date: 2018-05-11 3:45 pm – 4:15 pm
Last modified: 2018-04-27
Abstract
We study trust building in credence goods markets in a dynamic setting. The market collapses in the one-shot game due to information asymmetry. In the repeated game, consumers monitor an expert monopolist's honesty by rejecting his services. For any discount factor, the optimal equilibrium involves under- or over-treatment. The expert's profit weakly increases in the discount factor but cannot achieve the first best. The monitoring technology and equilibrium outcome contrast sharply with their counterparts for experience goods markets. Competition enhances efficiency by allowing consumers to use second opinions to monitor expert honesty more cost-effectively, but the efficiency gain comes at the cost of less honesty.