TY - JOUR
T1 - Second opinions and price competition
T2 - Inefficiency in the market for expert advice
AU - Pesendorfer, Wolfgang
AU - Wolinsky, Asher
N1 - Funding Information:
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.
PY - 2003/4
Y1 - 2003/4
N2 - 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.
AB - 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.
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U2 - 10.1111/1467-937X.00250
DO - 10.1111/1467-937X.00250
M3 - Article
AN - SCOPUS:0038135315
SN - 0034-6527
VL - 70
SP - 417
EP - 437
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 2
ER -