“Dishonesty of Experts and Obfuscation by Customers” by Yuk-fai Fong
Credence good is a product or service the amount or level of which a customer needs is known to the seller instead of the customer. In this paper, I first examine the pricing policy of an expert monopolist. I prove that nocheating is the unique equilibrium outcome despite absense of cheating cost, customers' search for second opinion and expert's concern for reputation. This result strengthens the view that prices can indeed serve as a commitment device to honesty and suggests that credence feature of expert services by itself does not explain fraudulent behavior. In the exploration of more subtle causes of cheating, I discover that price mechanism may fail to regulate experts' behavior when customers are heterogeneous in terms of (i) valuations of the treatments, (ii) awareness of their problems and (iii) costs to treat their problems. Furthermore, price mechanism may also fails if the expert's production cost is private information. In light of the observation that the expert would non-price discriminate by cheating customers of one type but not the other, I show that customers may withhold information from the expert, although this information otherwise may only be used to improve the expert's diagnosis and treatment.