DP6009 Competition Fosters Trust

Author(s): Steffen Huck, Gabriele K. Ruchala, Jean-Robert Tyran
Publication Date: December 2006
Keyword(s): competition, experience goods, information conditions, moral hazard, reputation, trust
JEL(s): C72, C92, D40, L14
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6009

We study the effects of reputation and competition in a stylized market for experience goods. If interaction is anonymous, such markets perform poorly: sellers are not trustworthy, and buyers do not trust sellers. If sellers are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting buyers access to all sellers’ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.