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 analyze a model where consumers sequentially search experts for treatment recommendations and prices, facing either zero or a positive search cost, while experts simultaneously compete in these two dimensions. In equilibrium, experts may “cheat” by overstating the severity of a consumer’s problem and recommending an unnecessary treatment, prices follow distributions depending on the problem type and the treatment, and consumers employ Bayesian belief updating about their problem types during search. Paradoxically, as search cost decreases, expert cheating and prices can both increase stochastically. However, if search cost is sufficiently small, competition will force 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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