Credence good
Encyclopedia
A credence good is a term used in economics
for a good whose utility
impact is difficult or impossible for the consumer to ascertain. In contrast to experience good
s, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information
. Examples of credence goods include;
This course of action—buying the second cheapest option—is observable by the restauranteur, who can manipulate the pricing on the menu to maximise their margin, i.e. ensuring that the second cheapest wine is actually the least good value. Another practical application of this principle would be for competing job applicants not to propose too low a wage when asked, lest the employer think that the employee has something to hide or does not have the necessary qualification for the job.
In an unregulated market, prices of credence goods tend to converge, i.e. the same flat rate
is charged for high and low value goods. The reason is that suppliers of credence goods tend to overcharge for low value goods, since the customers are not aware of the low value, while competitive pressures force down the price of high value goods.
Another reason for price convergence is that customers become aware of the possibility of being overcharged, and compensate by favoring more expensive goods over cheaper ones. For example, a customer may ask for a complete replacement of a broken car part with a new one, irrespective of whether the damage is small or large (which the customer doesn't know). In this case the new part is "proof" that the customer hasn't been overcharged .
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
for a good whose utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
impact is difficult or impossible for the consumer to ascertain. In contrast to experience good
Experience good
In economics, an experience good is a product or service where product characteristics such as quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption...
s, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information
Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...
. Examples of credence goods include;
- VitaminVitaminA vitamin is an organic compound required as a nutrient in tiny amounts by an organism. In other words, an organic chemical compound is called a vitamin when it cannot be synthesized in sufficient quantities by an organism, and must be obtained from the diet. Thus, the term is conditional both on...
supplements - EducationEducationEducation in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
- CarČarČar is a village in the municipality of Bujanovac, Serbia. According to the 2002 census, the town has a population of 296 people.-References:...
repairs - Many forms of medical treatment
- Home maintenance services, such as plumbingPlumbingPlumbing is the system of pipes and drains installed in a building for the distribution of potable drinking water and the removal of waterborne wastes, and the skilled trade of working with pipes, tubing and plumbing fixtures in such systems. A plumber is someone who installs or repairs piping...
and electricityElectricianAn electrician is a tradesman specializing in electrical wiring of buildings, stationary machines and related equipment. Electricians may be employed in the installation of new electrical components or the maintenance and repair of existing electrical infrastructure. Electricians may also...
.
Psychology of credence goods
Credence goods may display a direct (rather than inverse) relationship between price and demand, similar to Veblen goods, when price is the only possible indicator of quality. The least expensive products might be avoided in order to avoid suspected fraud and poor quality.. So a restaurant customer may avoid the cheapest wine on the menu, but instead purchase something slightly more expensive. However, even after drinking it the buyer is unable to evaluate its relative value compared to all the wines they have not tried (unless they are a wine expert).This course of action—buying the second cheapest option—is observable by the restauranteur, who can manipulate the pricing on the menu to maximise their margin, i.e. ensuring that the second cheapest wine is actually the least good value. Another practical application of this principle would be for competing job applicants not to propose too low a wage when asked, lest the employer think that the employee has something to hide or does not have the necessary qualification for the job.
In an unregulated market, prices of credence goods tend to converge, i.e. the same flat rate
Flat rate
A flat fee, also referred to as a flat rate or a linear rate, refers to a pricing structure that charges a single fixed fee for a service, regardless of usage. Rarely, it may refer to a rate that does not vary with usage or time of use...
is charged for high and low value goods. The reason is that suppliers of credence goods tend to overcharge for low value goods, since the customers are not aware of the low value, while competitive pressures force down the price of high value goods.
Another reason for price convergence is that customers become aware of the possibility of being overcharged, and compensate by favoring more expensive goods over cheaper ones. For example, a customer may ask for a complete replacement of a broken car part with a new one, irrespective of whether the damage is small or large (which the customer doesn't know). In this case the new part is "proof" that the customer hasn't been overcharged .
Further reading
- Horner, J. “Reputation and Competition.” American Economic Review, Vol. 92 (2002), pp. 644–661.
- Leland, H. “Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards.” Journal of Political Economy,Vol. 87 (1979), pp. 1328–1346.
- Mailath, G. and Samuelson, L. “Who Wants a Good Reputation?” Review of Economic Studies, Vol. 68 (2001), pp. 415–441.
- Spiegler, R. “The Market for Quacks.” Review of Economic Studies, Vol. 73 (2006), pp. 1113–1131.
- Wolinsky, A. “Competition in a Market for Informed Experts’ Services.” RAND Journal of Economics, Vol. 24 (1993), pp. 380–398.
- Wolinsky, A. “Competition in Markets for Credence Goods.” Journal of Institutional and Theoretical Economics, Vol. 151 (1995), pp. 117–131.