Credence goods and misbehaviour by unscrupulous sellers

Credence goods exist when the seller has specialist knowledge unavailable to the buyer and this information asymmetry can be used by some to gouge higher prices and extract consumer surplus.

If a taxi driver in an unfamiliar city knows that someone else is covering your fare, they are much more likely to charge you a higher price than is justified by the distance you are taken. That is one of the lessons from an economic experiment involving 400 undercover taxi rides in Athens, Greece.

The research by Loukas Balafoutas, Rudolf Kerschbamer and Matthias Sutter, published in the February 2017 issue of the Economic Journal, also finds that female customers are on average more susceptible to such fraudulent behaviour.

The study provides an example of a much wider problem in markets for ‘credence goods’, where expert sellers know more about consumers’ needs than the consumers themselves: sellers can use this information to charge unjustifiably high prices or dupe their customers in other ways.

A surprisingly large number of goods and services that we consume on an everyday basis can be described as credence goods.

Examples include medical services (where a doctor makes a diagnosis and orders a treatment); car or computer repair services (where a mechanic discovers a problem and recommends a solution); legal or financial services; taxi rides in unknown cities; and many others.

In these markets, if expert sellers exploit their informational advantage, they can increase their profits – for example, by providing an unnecessarily high quality or charging unjustifiably high prices. Such fraudulent behaviour creates damages to consumers and leads to economic inefficiencies.

The efficiency loss may be even more pronounced when the consumers do not have to bear the costs of the good or service themselves – for example, because they are insured or because someone else (an employer perhaps) is covering their costs.

In that case, expert sellers may anticipate that customers are not particularly concerned with minimising costs, and consequently misbehave even more.