Credence Goods Research Articles

Pricing for a credence good: an exploratory analysis

PurposeThis paper aims to explore the role of observable product characteristics and label wording in consumers' valuations for credence goods, products for which key characteristics may not be fully evaluated even after purchase. The objective is to draw conclusions with relevance to pricing policy.Design/methodology/approachHedonic price equations are estimated for a dietary supplement called black cohosh, taken by women for relief from menopausal symptoms.FindingsConsumers respond in expected ways to label words that directly indicate product characteristics: for example, paying more for a product labeled as suitable for vegetarians. But surprising results occur for some nonspecific label words (e.g. “guaranteed” is associated with lower prices), suggesting that consumers view these words as indirect signals with respect to unobservable qualities. Additionally, consumers pay more for packages containing more units (e.g. tablets) even when the time supply of product is held constant; this outcome is consistent with the notion that sheer quantity reassures consumers about value and could indicate a reaction to uncertainty in the overall value proposition.Research limitations/implicationsThe study relies on list prices in place of transacted prices, so consumers' true valuations may not be reflected with complete accuracy. The study should be repeated in the future using scanner data on actual product transactions.Practical implicationsThe indirect signals transmitted by label words and other observable attributes play a key role in consumers' valuations for credence goods, and so are highly relevant to pricing strategy.Originality/valuePrevious studies have considered willingness‐to‐pay for label‐indicated credence qualities, but have not looked at the role of indirect signals/indicators.

The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that liability or verifiability yield efficiency, we find that liability has a crucial, but verifiability at best a minor, effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. (JEL D12, D82)

How Much Can You Trust Online Information? Cues for Perceived Trustworthiness of Consumer-generated Online Information

Consumers increasingly rely on the Internet to obtain product information and advice from other consumers. However, since the information available on the Internet is easily manipulated, they have to seek cues for the trustworthiness of the online information. The present study proposes and tests the effects on perceived trust of online information and subsequent attitude of (1) perceived strong vs. weak social relationships among net pals and (2) positive vs. negative messages. The moderating effects of credence vs. experience goods are also examined in the research. Results show that, for experience goods, either positive or negative online messages will be perceived as credible as long as the messages are posted by those perceived to have close social relationships. On the other hand, for credence goods, negative online messages are perceived to be more credible than positive online messages when the messages are posted by those perceived to have close social relationships. Results also show the main effect of positive/negative messages on credibility of information, as well as that the effect of credibility of information on product attitude is weaker in the credence goods group than in the experience goods group.

CREDENCE GOODS MARKETS WITH CONSCIENTIOUS AND SELFISH EXPERTS*

I study credence goods markets when there are both selfish and conscientious experts. The selfish expert is a profit maximizer. The conscientious expert wants to maximize profit and repair the consumer's problem. There are two classes of equilibria: uniform-price equilibria and nonuniform-price equilibria. A consumer cannot infer the expert's type from his price list in a uniform-price equilibrium but can do that in a nonuniform-price equilibrium. When the fraction of the conscientious expert is small, the selfish expert will be honest about the severity of the consumer's problem. When the fraction of the conscientious expert is large, the selfish expert will cheat the consumer; overcharging the consumer whenever he offers to repair the problem. Finally, more conscientious experts may result in a larger social loss. When the fraction of the conscientious expert is close to one of the two extremes, 0 and 1, more conscientious experts will result in smaller social loss. When the fraction of the conscientious expert is in a middle range, more conscientious experts may result in a larger social loss.

Does the Market Punish Aggressive Experts? Evidence from Cesarean Sections

Abstract In many credence goods markets, a seller simultaneously diagnoses a problem and offers a recommendation to fix it. One might wonder what prevents these sellers from always exaggerating their customer’s needs. In this paper, we offer a simple explanation, namely, consumers may spurn sellers who have a reputation for such “demand inducement.” We test this explanation by examining patient choice of obstetrician in Florida. In most of the counties that we study, we find that maternity patients are significantly less likely to choose obstetricians who perform more than the expected number of cesarean sections. We address simultaneity by instrumenting for “inducement propensity” using information about the obstetrician's training. Although the instrument is weak, a series of robustness tests suggests that our findings are plausible while ruling out alternative explanations.

What Drives Taxi Drivers? A Field Experiment on Fraud in a Market for Credence Goods

Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behavior by sellers. This paper presents the results of a natural field experiment on taxi rides in Athens, Greece, set up to measure different types of fraud and to examine the influence of passengers’ presumed information and income on the extent of fraud. Results reveal that taxi drivers cheat passengers in systematic ways: Passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system leads to manipulated bills. Higher income seems to lead to more fraud.

What Drives Taxi Drivers? A Field Experiment on Fraud in a Market for Credence Goods

Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behavior by sellers. This paper presents the results of a natural field experiment on taxi rides in Athens, Greece, set up to measure different types of fraud and to examine the influence of passengers’ presumed information and income on the extent of fraud. Results reveal that taxi drivers cheat passengers in systematic ways: Passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system leads to manipulated bills. Higher income seems to lead to more fraud.

An Investigation of Pricing Data for Evidence of Institutional-Level Relationship Marketing Behaviors

The relationship marketing literature implies that relationship marketing behaviors are taking on an institutional-like quality. In this study, I use a unique approach for testing whether this is the case by comparing American consumer and producer pricing data over an extended period of time. I find that relationship marketing behaviors are increasing in frequency but perhaps not at the rate implied in the extant work. I also test for certain boundary conditions to the relationship marketing phenomenon. I find that credence goods see more relationship marketing behaviors than search and experience goods.

The impact of age and shopping experiences on the classification of search, experience, and credence goods in online shopping

This study explores how age and consumers' Web shopping experience influence the search, experience, and credence (SEC) ratings of products and services in online shopping. Using the survey data co...

The impact of corporate social responsibility associations on trust in organic products marketed by mainstream retailers: a study of Italian consumers

AbstractThis paper investigates the determinants of consumer attitudes toward organic products marketed by mainstream retailers under a private label. Since organic products are credence goods, consumers cannot directly verify whether these products comply with official standards. Organic labels are the primary source of consumer trust in organics, but these labels must be noticed and understood before consumers will actively seek them out. In that some consumers may not prioritize product labels when they shop, it is sometimes up to retailers to strengthen consumer trust. Within the antecedents of this trust, we isolated the contribution of the corporate social responsibility associations held by consumers about retailers. We surveyed Italian customers interested in organics and found that they are more likely to trust the private‐label organic products sold by a retailer when it is considered socially responsible. Our results also show that consumer trust translates into brand loyalty and a willingness to pay a premium price for organic products. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.

Are Fair Trade Goods Credence Goods? A New Proposal, with French Illustrations

In the literature, Fair Trade (FT) goods are usually associated with other products differentiated by process attributes such as organic food, genetically modified (GM) food or child labour-free clothing. All of these products are regarded as credence goods. This classification refers to the simplified definition of credence goods, which describes product attributes which consumers cannot evaluate, even after having consumed the good. Focusing on the characteristics of FT goods, this article proposes a reassessment of the link between FT goods and credence properties as defined by Darby and Karni. We first demonstrate that (1) the usual classification masks important particularities of FT goods compared to other goods with process attributes and (2) the full definition of credence goods may even provide a better description of the quality of FT goods. However – and this is our second theoretical contribution – the lack of consensus among experts concerning FT standards and their level of efficiency encourage us to consider FT goods as indeterminate goods as defined by Lupton. This result leads us to suggest a new typology of product attributes summarized in an innovative diagram. It sheds light on how competition between the different FT approaches works and why the FT market is still confined to a niche, if not threatened with collapse. We mainly illustrate our theoretical analysis with observations relating to the French FT market and institutions.

Product classifications, consumer characteristics, and patronage preference for online auction

An important unanswered question in the area of Internet auctions is what dynamics influences consumer preferences for shopping on these online auctions. Two key aspects of studying what sells on the Internet auctions are (a) the characteristics of products to be purchased and (b) consumer characteristics. This research focuses on the relationship between product purchase preference, prior experience, and socioeconomic characteristics for the online auction participants. It uses product classification theory rooted in information economics and marketing. The study results are based on a US national sample of online auction participants. The findings suggest that product class affects online auction patronage, yet socioeconomic characteristics may not be as influential as once perceived. The online merchants can benefit from the inquiry to improve auctions for search, experience, and credence goods. The five key contributions of the findings add value to the theory and practice of consumer behavior.

Guilt from Promise-Breaking and Trust in Markets for Expert Services: Theory and Experiment

We examine the influence of guilt and trust on the performance of credence goods markets. An expert can make a promise to a consumer first, whereupon the consumer can express her trust by paying an interaction price before the expert's provision and charging decisions. We argue that the expert's promise induces a commitment that triggers guilt if the promise is broken, and guilt is exacerbated by higher interaction prices. An experiment qualitatively confirms our predictions: (1) most experts make the predicted promise; (2) proper promises induce consumer-friendly behavior; and (3) higher interaction prices increase the commitment value of proper promises.

The Goodwill Model of the Competitive Market (Das Goodwill-Modell des Wettbewerbsmarktes) (German)

Consumers often cannot judge the quality of goods and services at the time of the purchase decision. The goodwill model explains how the market participants deal with this problem. It makes a distinction between markets for search goods, experience goods and credence goods. In markets for experience goods the goodwill mechanism can ensure completely by itself that suppliers behave with integrity. The goodwill mechanism causes irreversible costs of the market entrance in the form of goodwill investments for new suppliers. These irreversible costs of the market entrance lead to the fact that established suppliers can permanently achieve prize and volume premiums if they behave with integrity. Established suppliers, therefore, abstain from a hidden reduction of the quality of their products. The strength of the goodwill mechanism lies in the fact that it adapts itself in markets for experience goods to changed circumstances of the market by changes in the communications behavior of the market participants and thereby it stabilizes the market development and optimizes the market result. Markets for credence goods, however, are, in spite of the social institution Goodwill, characterized by market failure. The root causes for this result are selected sporadic bad quality deliveries which cannot be recognized by the consumers as those. Suitable regulations to stabilize markets for credence goods artificially generate irreversible costs of the market entrance for new suppliers. These created irreversible costs enable the established suppliers of credence goods to permanently earn positive economic profits by behaving with integrity. Numerous regulations which exist today in functioning markets for credence goods establish such irreversible costs of the market entrance. The abolition of such regulations can lead to market failure. An example having a lasting effect even today is the transformation which occurred between 1980 and 1999 of the US banking system which developed from a system of separated commercial and investment banks to a system of fully integrated banks.

Vertical product differentiation and credence goods: Mandatory labeling and gains from international integration

A traves de un modelo vertical de diferenciacion de productos se muestra el marco institucional que maximiza el bienestar cuando dos economias se integran comercialmente y coordinan sus politicas de etiquetado y certificacion. En particular, se muestra que el etiquetado discreto, armonizado y obligatorio no maximiza ganancias. Por ejemplo, la eleccion del tipo de etiquetado puede tener un efecto negativo sobre la estructura de mercado si las empresas deciden salirse, reduciendo asi el rango y la calidad de los bienes. Pero con reconocimiento mutuo de estandares de etiquetado existe una probabilidad mas alta de ganancia.

Endogenous Entry in Markets with Adverse Selection

In markets for experience or credence goods adverse selection can drive out higher quality products and services. This negative implication of asymmetric information about product quality for trading and welfare, poses the question of how such markets originate. We consider a market in which sellers make observable investment decisions to enter a market in which each seller's quality becomes private information. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are sustained in equilibrium, which results in above normal profits. The analysis suggests that rather than observing the canonical market collapse, markets with asymmetric information about product quality may instead be characterized by above normal profits even in markets with low measures of concentration and less entry than would be expected.

Public vs. Private Eco-Labeling of Environmental Credence Goods: Maximizing the Gains from International Integration

Using a model of vertical product differentiation, we analyze the welfare gains from economic integration when countries harmonize their eco-labeling and certification policies for environmental credence goods. Specifically, we show that harmonized mandatory, exclusive discrete labeling will not maximize the gains from economic integration, i.e., the choice of eco-labeling regime can have a negative effect on market structure if firms choose to exit, reducing the range and quality of goods in the integrated market, and thereby reducing aggregate environmental benefits. In contrast, under a harmonized mandatory, non-exclusive discrete labeling regime, private certification increases the likelihood of maximizing the gains from international economic integration.

The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.

The Impact of Distributional Preferences on (Experimental) Markets for Expert Services

Credence goods markets suffer from inefficiencies arising from informational asymmetries between expert sellers and customers. While standard theory predicts that inefficiencies disappear if customers can verify the quality received, verifiability fails to yield efficiency in experiments with endogenous prices. We identify heterogeneous distributional preferences as the main cause and design a parsimonious experiment with exogenous prices that allows classifying experts as either selfish, efficiency loving, inequality averse, inequality loving or competitive. Results show that most subjects exhibit non-standard distributional preferences, among which efficiency-loving and inequality aversion are most frequent. We discuss implications for institutional design and agent selection in credence goods markets.

Privatization of Credence Goods: Theory and an Application to Residential Youth Care

A wide range of services provided by the public sector are credence goods, i.e., services for which the producer has private information whether a certain treatment is needed or not. This paper studies how ownership affects the incentives for producers to reveal such information to public procurers. I develop a model where procurers buy a more extensive treatment in case quality is high. Private firms have strong incentives to reduce cost and must be given rents in order not to shirk on non-contractible quality. The existence of rents makes private firms induce demand for unnecessary treatments. Public sector managers have no incentive to cut cost, implying that optimal contracts don't entail rents unless quality is very important. Public sector managers instead use their informational advantage to avoid unpleasant tasks. Empirical evidence from residential care for teenagers with behavioral problems supports the model's predictions. Private ownership prolongs the duration of treatment by more than a year, doubling total cost. Unlike private facilities, public facilities are much more likely to initiate treatment breakdowns for teenagers that are particularly burdensome to treat.