Too Much or Too Little? Price-Discrimination in a Market for Credence Goods

Abstract

This article studies second-degree price-discrimination in markets for credence goods. Such markets are affected by asymmetric information because expert sellers are better informed than their customers about the quality that yields the highest surplus from trade. We show that discrimination regards the amount of advice offered to customers and that it leads to a different equilibrium distortion depending on the main source of heterogeneity among consumers. If consumers differ mainly in the expected cost needed to generate consumer surplus, the inefficiency occurring at the bottom of the type distribution involves overprovision of quality. By contrast, if consumers differ in the surplus generated whenever the consumer’s needs are met, the inefficiency involves underprovision of quality.