Abstract
Credence good markets, such as those for car repairs and medical treatments, are generally characterized by an ex-ante and ex-post information asymmetry between the uninformed customers and the informed expert. In this paper, we allow for both uninformed as well as informed customers to exist in a monopolist credence goods market. We analyze the implications of this kind of informational heterogeneity for the expert’s pricing decisions, incentives to commit fraud, as well as market efficiency and social welfare under different institutional arrangements. Most importantly, our approach enables us to evaluate endeavours to improve the level of customers’ information. Contrary to basic intuition, we find that recent developments and policy measures originally aimed at improving social welfare by increasing the level of information might actually backfire.
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