Credence Goods Research Articles

Certification Mechanisms for Credence Attributes of Foods: Does It Matter Who Provides Diagnosis?

Credence goods markets are subject to failure because consumers are unable to punish fraudulent experts who diagnose and supply treatment, and they lack the technical expertise with which to verify the quality of treatment actually offered. The focus of research in agricultural economics has been almost entirely on how labeling and certification of food products that contain credence attributes resolve the lemons problem. This ignores the crucial role that firms, nongovernmental organizations, or government regulatory agencies, acting either independently or jointly as experts, play in the process of diagnosis and treatment in credence goods markets. This is important if experts fail to act in good faith through their diagnosis and treatment.

УСЛОВИЯ ФОРМИРОВАНИЯ ОППОРТУНИСТИЧЕСКОГО ПОВЕДЕНИЯ СУБЪЕКТОВ РЫНКА ДОВЕРИТЕЛЬНЫХ БЛАГ

The article studies the conditions favorable for the formation of opportunistic behavior of subjects of the credence goods market. The absence of a number of rules, which should govern social and legal relations in the sphere under the study, along with imperfection and inefficiency of the existing rules allowed to identify a group of institutional conditions for developing opportunism. The limitations of competition, the variability of the economic environment, wide range of differentiated products and the unevenness of their distribution, the dependence on external raw material sources form the group of market conditions. Impulsivity, suspiciousness and difficult predictability of the behavior of ordinary consumers, but also inherent in modern society the spiritual and moral decline form the group of socio-psychological conditions for opportunistic behavior. The article discusses in detail each of the groups, the examples of the Russian practice are given.

Health Services as Credence Goods: A Field Experiment

Agency problems are a defining characteristic of health care markets. We present the results from a field experiment in the market for dental care: A test patient who does not need treatment is sent to 180 dentists to receive treatment recommendations. In the experiment, we vary the socio-economic status (SES) of the patient and whether a second opinion signal is sent. Furthermore, measures of market, practice and dentist characteristics are collected. We observe an overtreatment recommendation rate of 28 % and a striking heterogeneity in treatment recommendations. Furthermore, we find significantly less overtreatment recommendations for patients with higher SES compared to lower SES for standard visits, suggesting a complex role of patients' SES. Competition intensity, measured by dentist density, does not have a significant influence on overtreatment. Dentists with shorter waiting times are more likely to propose unnecessary treatment.

What Drives Fraud in a Credence Goods Market? – Evidence from a Field Study

AbstractThis paper investigates the impact of competition on an expert firm's incentive to defraud its customers in a credence goods market. Controlling for the competence of car repair shops, their financial situation, and reputational concerns, we use and complement the data set from a nationwide field study conducted by the German Automobile Association that regularly checks the reliability of garages in Germany. We find that more intense competition lowers a firm's incentive to defraud its customers.

Institutional design for credence goods: Can the existence of financial incentive be problematic? Evidences from childbirth system of Bangladesh

ABSTRACTThe introduction of an incentive system in order to increase the provision of credence goods such as health services can be problematic. This article identifies the possible magnitude of overtreatment by physicians in private clinics compared with the situation in government and nongovernment health facilities in Bangladesh. The five to ten times higher volume of cesarean childbirths in private clinics (higher incentive institutions) compared with the volume in government/NGOs health facilities (lower incentive institutions) is indicative of the problem of overtreatment. This problem may become acute where there is only one private clinic in an area; however, the mere increase in the number of private clinics may not solve the problem.

Trust Building in Credence Goods Markets

We study trust building in credence goods markets in a dynamic setting. An extreme lemon problem arises in the one-shot game and results in no trade. In the repeated game, an expert's honesty is monitored through consumers' rejection of his recommendations. We characterize the optimal equilibrium for any discount factor. The expert's profit in the optimal equilibrium weakly increases in the discount factor but cannot achieve the first best because the optimal equilibrium either involves insufficient treatment for the serious problem or excessive treatment for the minor problem. The monitoring technology and the equilibrium outcome contrast sharply with their counterparts for experience goods markets. Competition enhances efficiency by allowing consumers to search for second opinions after rejecting the first treatment recommendation, but the efficiency gain comes at the cost of less honesty.

Payment scheme self-selection in the credence goods market: An experimental study

Given heterogeneity in expert behavior across payment schemes in credence goods markets, it is important to understand the consequences of payment scheme selection on market outcomes. To study the effect that expert payment selection has on customer well-being, we recruited subjects to participate in a real-effort credence goods laboratory game. Experts were either randomly assigned or faced with the choice of three payment schemes: fee-for-service, salary, and capitation. We found that when experts selected fee-for-service payment customers experience significantly worse outcomes than when experts were randomly assigned to fee-for-service. In contrast, whether experts selected or were randomly assigned to salary payment, customer outcomes did not change.

Liability and Reputation in Credence Goods Markets

This paper studies the impact of liability on a credence-good seller's incentives to maintain a good reputation. Credence goods markets are characterized with information asymmetry about the value of sellers' services to consumers who must rely on sellers for diagnosis and treatment provision. Liability refers to the legal environment in which the seller is liable for fixing consumers' problems after charging them the price for his treatment. When the seller is short-lived, liability mitigates information asymmetry and facilitates trade. Nevertheless, liability may undermine a long-lived seller's incentive to maintain a good reputation and reduces market efficiency.

Intermediaries and consumer search

This paper discusses how intermediaries, such as a search engine and an online marketplace, may affect consumer search. We propose an analytical framework that encompasses several models of search for differentiated products, with a high-quality firm being more likely to offer a product that meets each consumer’s need. An intermediary improves consumer search efficiency by providing a search platform on which positions are sold to high-quality firms through competitive bidding. While the intermediary may admit too many or too few firms to its platform, compared to what would maximize consumer surplus or total welfare, its presence can nevertheless benefit consumers and improve welfare. However, the intermediary may reduce search efficiency when firms are differentiated only horizontally, when they sell experience or credence goods, or when the intermediary is biased (possibly due to vertical integration).

Introduction to the Corporate Governance of Religion

Stationed at the border between the past and the present, the corporate governance of religion is concerned with the governance mechanisms by which religious organizations are controlled and directed. Building on similarities between contemporary organizations and their predecessors in Roman Catholic monasticism, this essay illustrates that studying the past can be of enormous benefit. It allows us to see familiar problems in a new light: for example, bureaucratic rules – nowadays no longer linked to efficiency – that emerged in Catholic orders and enabled organizational learning, innovations, and survival in uncertain environments. The study of the past is also an appreciation for the kind of governance mechanisms that have staying power: Catholic orders can be viewed as pioneers of corporate governance and show what kind of governance is suitable to reduce agency problems. Finally, when abstract organizational theories are presented in a historical context it makes them more palatable, more understandable and more interesting: the theory of the optimal colocation of decision rights within the specific knowledge framework of organizations is supported in Catholic orders. They decentralize their local communities the higher the ratio of credence goods produced, and centralize their local communities the higher the ratio of search/experience goods produced.

Credence Goods, Costly Diagnosis and Subjective Evaluation

We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low‐cost service is sufficient or whether a high‐cost treatment is required to solve the consumer’s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low‐cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer’s report, or subjective evaluation. A failure of the low‐cost treatment delays the solution of the consumer’s problem by the high‐cost treatment to a second period. We show that the first‐best solution can always be implemented if the parties’ discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first‐best can be obtained. In an extension we show that the first‐best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.

Control in the Label - Self-Declared, Certified, Accredited? On-Pack Consumer Communication about Compliance Control in Voluntary Food Schemes from a Legal Perspective

In the EU, the number of voluntary food schemes has grown rampantly over the past 20 years. From a consumer perspective, what was initially praised as a solution to the information asymmetry problem of credence goods soon became a problem of itself: consumers do not know what the various food scheme labels mean. Some authors therefore propose education measures to help consumers better understand labels. In this contribution, we approach the issue from a different angle and show that on pack communication of food scheme labels offers significant opportunities for influencing consumer perceptions. We argue therefore that food businesses are under a legal duty not to mislead consumers and to ensure that information is sufficiently clear.

An empirical study on consumer online shopping channel choice behavior in omni-channel environment

With the rapid diffusion of smart devices, retailers provide new forms of interactive communication channels, enabling their consumers to access through the mobile channel. The retailers recognize the importance of the mobile channel as an efficient sales channel and as a tool for CRM (Customer Relationship Management). However, CRM has become increasingly complex after adopting it to the mobile channel. It is imperative for retailers to understand consumer behavior in an omni-channel circumstance. Using the four-year transaction data obtained from the online home-shopping provider that expanded its online service (telephone, ARS, Internet website) onto a mobile platform, this research analyzes the consumer channel choice behavior in the perspectives of consumer sociodemographic information, consumer behavior, and corporate communication strategies. To explain channel choices in the omni-channel environment, we use multivariate probit model with sociodemographic variables, communication strategies, order hour, and product categories. Our empirical results indicate that age and gender have significant influences on channel choice behavior. Consumer fixates their inflow channel. Communication strategies such as SMS and app push alarm significantly influence consumer channel choice. Consumers using mobile channel are making purchases without time constraints, while others not. We observed that products that have characteristics of experience goods or credence goods tend to be purchased via mobile and Internet channels that provide detailed and additive information like consumer reviews. Finally, the results revealed substitution effect between most of the channels, except for the Internet and telephone. Our investigation contributes to omni-channel online shopping literature by empirically testing the choice behavior, cross-channel effects, and also by providing insights for online retailers.

Regulatory theory: commercially sustainable markets rely upon satisfying the public interest in obtaining credible goods.

Regulatory theory is premised on the failure of markets, prompting a focus on regulators and industry from economic perspectives. This article argues that overlooking the public interest in the sustainability of commercial markets risks markets failing completely. This point is exemplified through health care markets - meeting an essential need - and focuses upon innovative medicines as the most desired products in that market. If this seemingly invulnerable market risks failure, there is a pressing need to consider the public interest in sustainable markets within regulatory literature and practice. Innovative medicines are credence goods, meaning that the sustainability of the market fundamentally relies upon the public trusting regulators to vouch for product quality. Yet, quality is being eroded by patent bodies focused on economic benefits from market growth, rather than ensuring innovatory value. Remunerative bodies are not funding medicines relative to market value, and market authorisation bodies are not vouching for robust safety standards or confining market entry to products for 'unmet medical need'. Arguably, this failure to assure quality heightens the risk of the market failing where it cannot be substituted by the reputation or credibility of providers of goods and/or information such as health care professionals/institutions, patient groups or industry.

Building Trust by Qualification in a Market for Expert Services

Markets for credence goods are classified by experts alone being able to identify consumers’ problems and determine appropriate services for solution. Examining a market where experts have to invest in costly diagnosis to correctly identify problems and consumers being able to visit multiple experts for diagnosis, we introduce heterogeneously qualified experts. We assume that high skilled experts can identify problems with some probability even with low effort, e.g. due to education or experience. In a laboratory experiment we show that, against our theoretical predictions, this does not lead to a drop in experts’ willingness for high diagnostic effort. However, consumers generally distrust experts’ diagnosis effort as they buy less often after their first recommendation than it would be optimal and show frequently other non-optimal behavior patterns, e.g. receiving recommendations but do not buy service. Our results indicate that, at some level, introducing higher qualified experts increases the quality of diagnosis, as well as consumers’ trust resulting in more and quicker service purchases.

Understanding the Runaway Tuition Phenomenon: Credence Goods in an Age of Skepticism

Seeking to explain why college tuitions are so rapidly increasing, and finding nothing compelling in the usually-offered stories, the author stumbles upon the answer in plain sight. Because of the kind of product higher education is (a credence good) sellers must go to heroic lengths to keep up the semblance that the product is worth all that is charged for it. Money and resources of other kinds must be directed to this end to the limit of their availability, which can never be satiated no matter how much is spent. The economist Howard Bowen seems to have had the basic insight in 1980. The present paper, however, argues that the driving force behind the phenomenon isn’t competition but rather a rational fear, that even a monopolist might have, that the public will stop believing in the worthiness of the product.

The Economics of Credence Goods – a Survey of Recent Lab and Field Experiments*

Many important markets, such as those for health care or repair services, are characterized by pronounced informational asymmetries between buyers and sellers – because the buyer cannot identify the quality of the product that fits her needs best, while the seller can do so by performing a diagnosis. The seller can then recommend the appropriate or an inappropriate quality. Since the buyer has no means to verify the correctness of the recommendation but has to rely on the honesty of the seller, such goods are called credence goods. Markets for credence goods are typically plagued by incentives for fraudulent behavior and by inefficiencies caused by actual or expected fraud, covering overprovision and overcharging. Although highly policy relevant, a carefully controlled analysis of the provision of credence goods through the use of experiments has only recently taken off. Here, we provide an overview about recent laboratory and field experiments on the economics of credence goods and discuss important implications and directions for future research.

Mass-Production of Professional Services and Pseudo-Professional Identity in Tax Preparation Work

How is mass-production of professional services possible? Since professional services are credence goods, consumers rely on signals of expertise, like credentials and professional behavior of the s...

When Discounts Hurt Sales: The Case of Daily-Deal Markets

We investigate whether the discounts offered by online daily deals help attract consumer purchases. By tracking the sales of 19,978 deals on Groupon.com and conducting a battery of identification and falsification tests, we find that deep discounts reduce sales. A 1% increase in a deal’s discount decreases sales by 0.035%–0.256%. If a merchant offers an additional 10% discount from the sample mean of 55.6%, sales could decrease by 0.63%–4.60%, or 0.80–5.24 units and $42–$275 in revenue. This negative effect of discount is more prominent among credence goods and deals with low sales, and when the deals are offered in cities with higher income and better education. Our findings suggest that consumers are concerned about product quality, and excessive discounts may reduce sales immediately. A follow-up lab experiment provides further support to this quality-concern explanation. Furthermore, it suggests the existence of a “threshold” effect: the negative effect on sales is present only when the discount is sufficiently high. Additional empirical analysis shows that deals displaying favorable third-party support, such as Facebook fans and online reviews, are more susceptible to this adverse discount effect. We draw related managerial implications. The online appendix is available at https://doi.org/10.1287/isre.2017.0772 .

Expert Qualification in Markets for Expert Services: A Sisyphean Task?

Moral hazard in expert diagnoses is more complicated in credence goods markets because ex-post verification of service optimality is usually not possible. We provide an experimental framework to investigate expert and consumer behavior as well as market efficiency in a setting in which experts need to invest in costly but unobservable effort to identify consumer problems and consumers are able to visit multiple experts for diagnosis. We introduce heterogeneously-qualified experts, varying in their necessary effort to diagnose consumers. We examine how subjects react to expert qualification and the introduction of price competition. We find that our baseline market is more efficient and qualification is not necessarily the Sisyphean task, as theory predicted. Nevertheless, we observe high skilled experts investing significantly less effort in diagnoses than their low skilled counterparts. Qualifying experts increases efficiency with fixed prices but remains almost without influence in markets with price competition. Introducing price competition does not lead to the predicted market breakdown, but rather has negative effects on market efficiency. In sum, whether expert qualification should be pursued in credence goods markets depends on the market composition and existing institutions.