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I would like to know how the market, if left to itself (i.e. no government intervention allowed), would solve the problem of information asymmetry in experience goods as well as credence goods. What are some solutions to this problem?

Both broad answers (listing the different options available) and deep answers (discussing a few examples in detail) are welcome. Links to resources would also be helpful.

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The common trait for both of these goods is that the "utility" is unobservable beforehand and only realized post-consumption (experience) or possible not observable at all (credence).

Based on this, there are four possible markets for information: information produced by the consumers and producers of the goods and information before and after consumption. Here are some examples of real-life examples:

  1. Producer before: Marketing and signaling (e.g. Whitepapers for new cryptocurrencies)
  2. Consumer before: Inferential and relative information on similar goods (e.g. Zillow for homes)
  3. Producer after: Statistical analyses (e.g. Clinical trials for medicine)
  4. Consumer after: Review sites (e.g. Yelp for restaurants)

None of these would require a government, thought might be strengthened by regulation. For instance, one might suppose very strong information markets pre-consumption would prevent any purchases of "lemon" goods, but for that same reason there might be strong incentive for the producer to commit fraud in pre-sale marketing and post-sale analyses.

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For a high-value credence good, a guarantee or warranty can give a buyer a degree of protection against the risk of a good being of poor quality in some respect that is unobservable (or hard to detect without expertise) at the time of receipt. The difference between a guarantee and a warranty is explained here.

For example, a home owner engaging a firm of builders or plumbers to undertake major repairs may be able to observe that the job has been neatly done, but be unable to judge the quality of materials used or to assess how long the repair will last. Similarly, someone buying a new car will be able to learn quite a lot about it by observation and a test drive, but still be uncertain whether faults in manufacture may come to light later or how long components will last. A guarantee or warranty giving the buyer a legal claim against the seller or manufacturer should problems become apparent may protect the buyer and, from the seller's perspective, increase sales by giving customers confidence to buy.

However, guarantees and warranties are not a panacea for several reasons:

  1. They are usually time-limited, and the time limit may be shorter than what the buyer considers to be the reasonable life of the good.
  2. They are less suitable for low-value goods as the work and effort potentially involved for both parties could be disproportionate to the value.
  3. Buyers will know that, should they have occasion to make a claim, it could become a matter of dispute, eg as to whether the terms of a guarantee had been complied with.
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