Consumer Behavior Under Conflicting Information Provided by Interested Parties: Implications for Equilibrium in the Market for Credence Goods.

Abstract

Incomplete information in food consumption is a relevant topic in agricultural economics. This paper proposes a theoretical model describing consumer behavior, market equilibrium and public intervention in an industry where consumers must rely on the information of interested parties such as producers or associations. We provide simple game theory model showing the link between price competition and the strategic use of information. If information are unverifiable (as in the case of credence attributes) firms may have no incentive to advertise true claims and consumer decisions may be biased. Our model incorporates the opportunistic behavior of self-interested information providers. The result is a model of competition in prices and information finding a potential for market failure and public intervention. In the paper we discuss the efficiency of three possible regulations: banning false claims, subsidizing advertising campaigns, and public statement if favor of true claims. In that context, some recent patents related to both the regulatory compliance in communication and to the reduction of asymmetric information between producers and consumers have been considered. Finally, we found that the efficiency of these policy tools is affected by the reputation of trustworthiness of the firms.