Monday, July 14, 2014
Uwe Dulleck, QUT, Rudolf Kerschbamer, University of Innsbruck and Alexander Konovalov, University of Gothenburg ask Too much or too little? Price-discrimination in a market for credence goods.
ABSTRACT: In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality.