Defensive treatment in credence good markets – Does reputation or norms improve efficiency?
Presenter
Doctoral Candidate at the School of Information
Abstract
Some credence goods markets have asymmetric information such that buyers cannot determine what service is sufficient for their needs and whether an unlucky outcome after service is due to insufficient service or bad luck. This gives rise to inefficiencies such as overprovision of service by the seller who seeks to avoid the costly aftermath of interacting with buyers who may “cry” after an unintended failed service. This study investigates credence goods markets in which overprovision guarantees a 100% success rate while sufficient treatment, which maximizes the buyer’s expected utility, does not. When low-cost treatment fails, the buyer is unsure whether it was due to undertreatment or bad luck after sufficient treatment, and she can engage in “crying behaviors”, defined as buyer behaviors that express their dissatisfaction with the seller which increase their own payoff but reduces the seller’s payoff. The unique (pure-strategy) Bayesian Nash Equilibrium of this market is that the seller overtreats and the buyer “cries”, which is Pareto-dominated by the strategy profile that the seller provides sufficient treatment and the buyer chooses not to “cry”. To help sellers and buyers reach the Pareto-efficient outcome, I extend the one-shot game to a repeated game and introduce a reputation system in which the seller’s treatment history and the buyer’s reaction is publicly visible, and I show that there exists a perfect public equilibrium that the seller and buyer will frequently play the Pareto-efficient strategy profile. I also propose priming of social norms to promote Pareto-efficient actions. I conduct a laboratory experiment to test these solutions and predict that seller and buyer surplus will be higher when the reputation system is introduced or the social norm is primed, compared with the baseline condition.