Service Refusal in Regulated Markets for Credence Goods

Abstract

This paper analyzes dynamic selection effects in markets for credence goods where price structures are determined by a regulator or by central management. There are different types of consumers and each type requires a different service or treatment level. We show that for a large class of price structures some types of consumers are not treated and refused the service. Equilibria with selection are welfare inferior to equilibria without selection. We also characterize the class of price structures for which selection does not arise. As the market becomes larger or service providers become more patient the class of selection-free price structures shrinks and in the limit it is unique. We show that this unique price structure also removes incentives for overtreatment.

Keywords: Credence goods, Overtreatment, Selection effects

JEL Classification: I11, L51