DP5242 Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need

Author(s): Uwe Dulleck, Rudolf Kerschbamer
Publication Date: September 2005
Keyword(s): credence goods, discounters, experts, vertical restraints
JEL(s): D40, D82, L15
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5242

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.