Search and competition in expert markets

Cao, Yiran and Chen, Yongmin and Ding, Yucheng and Zhang, Tianle (2022): Search and competition in expert markets.

Abstract

We develop a model in which consumers sequentially search experts for recommendations and prices to treat a problem, and experts simultaneously compete in these two dimensions. Consumers have either zero or a positive search cost. In equilibrium, experts may "cheat" by recommending an unnecessary treatment with positive probabilities, prices follow distributions that depend on a consumer's problem type and the treatment, and consumers search with Bayesian belief updating about their problem types. Remarkably, as search cost decreases, both expert cheating and prices can increase stochastically. However, if search cost is sufficiently small, competition forces all experts to behave honestly.

• Item Type: MPRA Paper
• Language: English
• Keywords: search, experts, competition, credence good
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance

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