Markets for Services are Different

Abstract

This paper focuses on a major difference between markets for physical goods and for services. It is argued that dishonest sellers of physical goods are eventually identified and forced to leave the market. In contrast, dishonest sellers of services can effectively mimic honest competitors and drive them out of the market. This ability of dishonest service suppliers can lead to market failure. In order to prevent such a failure it is proposed to introduce some kind of market entry fees which have the character of sunk costs.

Keywords: sunk costs, quality uncertainty, search goods, experience goods, credence goods, established suppliers, dishonest sellers, market failure

JEL Classification: D02, D11, D18, D41, D82, D83, G18, K23, L51