Abstract
We consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer's need. In our model, experts offer competing contracts and the consumer may gather multiple opinions. We explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort. In particular, the equilibrium fails to realize the second best welfare optimum. An intervention, that limits price competition via price control, increases welfare.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 417-437 |
| Number of pages | 21 |
| Journal | Review of Economic Studies |
| Volume | 70 |
| Issue number | 2 |
| DOIs | |
| State | Published - Apr 2003 |
Funding
Acknowledgements. Financial support from the National Science Foundation under grants 9796256, 9911177 and 9911761 is gratefully acknowledged. The paper has benefited from the comments of an editor and three anonymous referees.
ASJC Scopus subject areas
- Economics and Econometrics