Podcast
Questions and Answers
Information asymmetry exists when there is an equal distribution of knowledge between the producer/seller and the consumer/buyer regarding a product.
Information asymmetry exists when there is an equal distribution of knowledge between the producer/seller and the consumer/buyer regarding a product.
False (B)
For products that can be classified as 'search goods', a consumer typically assesses the product's characteristics after making a purchase.
For products that can be classified as 'search goods', a consumer typically assesses the product's characteristics after making a purchase.
False (B)
Markets for experience goods tend to be less concentrated because consumers can easily evaluate different brands before committing to a purchase.
Markets for experience goods tend to be less concentrated because consumers can easily evaluate different brands before committing to a purchase.
False (B)
Extensive experimentation with multiple brands by consumers typically lowers the monopoly power of a single brand.
Extensive experimentation with multiple brands by consumers typically lowers the monopoly power of a single brand.
For experience goods, geographical clustering of shops is always important because consumers tend to rely on local options for trial.
For experience goods, geographical clustering of shops is always important because consumers tend to rely on local options for trial.
Long-term business relationships can mitigate information asymmetry issues, especially regarding product information.
Long-term business relationships can mitigate information asymmetry issues, especially regarding product information.
Advertising serves only as a promotional tool and does not act as a signal of product quality or company reputation.
Advertising serves only as a promotional tool and does not act as a signal of product quality or company reputation.
Credence goods are easily evaluated by consumers after purchase because their characteristics are immediately apparent.
Credence goods are easily evaluated by consumers after purchase because their characteristics are immediately apparent.
In markets for credence goods, regulation can help to prevent market failure caused by information asymmetry and potential quality issues.
In markets for credence goods, regulation can help to prevent market failure caused by information asymmetry and potential quality issues.
In health care, financial incentives such as case rates always guarantee higher quality of care because providers are motivated to maximize patient outcomes.
In health care, financial incentives such as case rates always guarantee higher quality of care because providers are motivated to maximize patient outcomes.
The rise of digital markets has reduced search costs for consumers, particularly for search goods, by facilitating price and characteristic comparisons.
The rise of digital markets has reduced search costs for consumers, particularly for search goods, by facilitating price and characteristic comparisons.
Information overload, a consequence of digital markets, always helps consumers make better choices because they have access to more details.
Information overload, a consequence of digital markets, always helps consumers make better choices because they have access to more details.
With more brands tested, the monopoly power decreases.
With more brands tested, the monopoly power decreases.
Asymmetry between producers and consumers regarding information on products is typically never present.
Asymmetry between producers and consumers regarding information on products is typically never present.
Consumers testing $n$ brands to determine the most preferred one is a characteristic of experience goods.
Consumers testing $n$ brands to determine the most preferred one is a characteristic of experience goods.
Experiments by consumers are often random and not based on prior information.
Experiments by consumers are often random and not based on prior information.
A 'Made-in-Germany' label can be a signal to consumers about the quality and origin of a product.
A 'Made-in-Germany' label can be a signal to consumers about the quality and origin of a product.
For search goods, product variety is less important than for experience goods.
For search goods, product variety is less important than for experience goods.
Creedence characteristics are exposed on advertisements.
Creedence characteristics are exposed on advertisements.
Flashcards
Information Asymmetry
Information Asymmetry
An imbalance in information between producer/seller and consumer/buyer regarding products.
Search Good
Search Good
A product with characteristics easily evaluated before purchase (e.g., clothing).
Experience Good
Experience Good
A product whose characteristics are difficult to assess before purchase, but are revealed after use (e.g., restaurant meal).
Market Concentration for Experience Goods
Market Concentration for Experience Goods
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Credence Good
Credence Good
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Problems in Credence Good Markets
Problems in Credence Good Markets
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Impact of Internet on Search Costs
Impact of Internet on Search Costs
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Digital Impact on Experience Goods
Digital Impact on Experience Goods
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Study Notes
- There is an asymmetry between the producer/seller and consumer/buyer regarding product information.
- The producer/seller typically knows the characteristics of their product.
- Products differ based on the information available to consumers.
Search Good
- Consumers know the product characteristics before purchasing.
Experience Good
- Consumers cannot assess the characteristics before purchase but find out afterward, increasing the search costs.
Market Concentration
- Markets for experience goods are expected to be more concentrated.
- Consumers search for a preferred product by experiencing 'n' brands.
- Experiments are often based on prior information and aren't random.
- A relationship is created between brands used in the experiment of one consumer and the brands used by others.
- The number of brands in the market depends on the number of experiments conducted.
- Fewer experiments lead to more consumers concentrated among fewer brands.
- A larger number of brands tested results in lower monopoly power.
Institutional Responses
- Word of mouth referrals, advice from friends, and online reviews are important.
- Clustering is less important for experience goods.
- Inspection in the shop is important for search goods.
- Advertising can be a signaling mechanism.
- Labels indicating products are "Made-in-Germany" can influence consumers.
- Long-term business relationships matter.
- Product variety is more important for search goods.
Credence Goods (Darby & Karni, 1973)
- Consumers cannot learn quality through experience without additional costs.
- Credence characteristics, like product ingredients or production methods, remain hidden even after purchase.
- Many products possess search, experience, and credence characteristics.
- Market failure can easily occur in credence goods markets if there's no regulation.
Problems in Markets for Credence Goods
- The provision of quality
- Overtreatment/undertreatment issues
- Overcharging
Examples of Credence Goods Issues
- Financial incentives in healthcare raise questions about case rates and the balance between efficiency and quality.
- Taxi drivers may take longer routes if the customers are not from the local area.
- Half of the car repairs in the US are potentially unnecessary.
Impact of Digital Markets
- The internet reduces search costs.
- Prices and characteristics of a large number of search goods can be compared quickly.
- Customer reviews and immediate testing (e.g., software) are useful for experience goods.
- Markets become more transparent through digital platforms.
- There is a risk of choice and information overload: too much information might not always help.
- Effective search relies on the quantity and quality of information, plus comparison of alternatives.
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