Credence good

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A credence good is a good whose utility impact is difficult or impossible for the consumer to ascertain. In contrast to experience goods, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information. Examples of credence goods include;

Psychology of credence goods[edit]

Credence goods may display a direct (rather than inverse) relationship between price and demand, similar to Veblen goods, when price is the only possible indicator of quality. The least expensive products might be avoided in order to avoid suspected fraud and poor quality.[1] So a restaurant customer may avoid the cheapest wine on the menu, but instead purchase something slightly more expensive. However, even after drinking it the buyer is unable to evaluate its relative value compared to all the wines they have not tried (unless they are a wine expert).

This course of action—buying the second cheapest option—is observable by the restaurateur, who can manipulate the pricing on the menu to maximize their margin, i.e. ensuring that the second cheapest wine is actually the least good value. Another practical application of this principle would be for competing job applicants not to propose too low a wage when asked, lest the employer think that the employee has something to hide or does not have the necessary qualification for the job.

In an unregulated market, prices of credence goods tend to converge, i.e. the same flat rate is charged for high and low value goods. The reason is that suppliers of credence goods tend to overcharge for low value goods, since the customers are not aware of the low value, while competitive pressures force down the price of high value goods. [2]

Another reason for price convergence is that customers become aware of the possibility of being overcharged, and compensate by favoring more expensive goods over cheaper ones. For example, a customer may ask for a complete replacement of a broken car part with a new one, irrespective of whether the damage is small or large (which the customer doesn't know). In this case the new part is "proof" that the customer hasn't been overcharged.[2]

References[edit]

  1. ^ Winand Emons (1996-06-01). "Credence Goods and Fraudulent Experts". The Rand Journal of Economics. 
  2. ^ a b "Sawbones, cowboys and cheats". The Economist 378 (8473): 78. 2006-04-15. 

Further reading[edit]

  • Dulleck, U. and Kerschbamer, R. “On Doctors, Mechanics and Computer Specialists: The Economics of Credence Goods.” Journal of Economic Literature,Vol. 44 (2006), pp. 5-42.
  • Horner, J. “Reputation and Competition.” American Economic Review, Vol. 92 (2002), pp. 644–661.
  • Leland, H. “Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards.” Journal of Political Economy,Vol. 87 (1979), pp. 1328–1346.
  • Mailath, G. and Samuelson, L. “Who Wants a Good Reputation?” Review of Economic Studies, Vol. 68 (2001), pp. 415–441.
  • Spiegler, R. “The Market for Quacks.” Review of Economic Studies, Vol. 73 (2006), pp. 1113–1131.
  • Wolinsky, A. “Competition in a Market for Informed Experts’ Services.” RAND Journal of Economics, Vol. 24 (1993), pp. 380–398.
  • Wolinsky, A. “Competition in Markets for Credence Goods.” Journal of Institutional and Theoretical Economics, Vol. 151 (1995), pp. 117–131.