Price competition and reputation in markets for experience goods: An experimental study

Date: 2015
By: Huck, Steffen
Lünser, Gabriele K.
Tyran, Jean-Robert
URL: http://d.repec.org/n?u=RePEc:zbw:wzbeoc:spii2013312r&r=net
We experimentally examine the effects of price competition in markets for expe-rience goods where sellers can build up reputations for quality. We compare price competition to monopolistic markets and markets where prices are exogenously fixed (somewhere between the endogenous oligopoly and monopoly prices). While oligopolies benefit consumers regardless of whether prices are fixed or endoge-nously chosen, we find that price competition lowers efficiency as consumers pay too little attention to reputation for quality. This provides empirical support to recent models in behavioral industrial organization that assume that consumers may with increasing complexity of the market place focus on selected dimensions of products. We also find that consumers’ attention to quality and, hence, provided quality drops when regulated prices are set at levels that are too low.
Keywords: Markets,Price competition,Behavioral IO,Price regulation,Reputation,Trust,Moral hazard,Experience goods
JEL: C72 C90 D40 D80 L10

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