"Credence goods monopolists"JEL codes: D45; D82; L15
Abstract: With a credence good consumers are never sure how much of the good they actually need. Therefore, the seller acts as the expert determining the customers' requirements. This information asymmetry creates strong incentives for the seller to cheat on services. We analyze whether the market mechanism may induce non-fraudulent seller behavior. We consider four scenarios differing in the amount of information consumers have at hand to infer the seller's incentives to be honest. In three constellations the profit maximizing credence goods monopolist provides honest services; only in one scenario there is no trade.