Reputation, Competition, and Second Opinion: An Experiment in Credence Goods Market

Abstract

Credence goods are products and services for which buyers are unable to observe the quality they require. Incomplete information and biased advice from experts typically lead to inefficient outcomes in such markets. In this thesis, I set-up laboratory experiments to investigate whether and to which degree reputational concerns and competition can solve the credence good problem. I use a novel experimental design that implements innite horizon interactions and allows buyers to choose a service level that is different from the seller's recommendation. The results show that private reputation building in a repeated game setting does have a weak effect on improving market outcomes. Competition significantly reduces sellers' fraudulent behaviour and increases buyers' trust. With competition, the level of undertreatment is significantly less. The possibility of collecting second opinions has no obvious effect when both reputational concerns and competition are present