The Market for Quacks
Foerder Working Paper No. 21-03
Posted: 18 Jan 2005
Date Written: January 2005
Abstract
A group of n quacks plays a price-competition game, facing a continuum of patients, who recover with probability alpha whether or not they acquire a quack's treatment. If patients chose rationally, the market would be inactive. I assume, however, that patients choose according to a boundedly rational procedure, which reflects anecdotal reasoning. This element of bounded rationality has significant implications. The market for quacks is active and patients suffer a welfare loss which behaves non-monotonically w.r.t n and alpha. When quacks are allowed to choose their treatment, they differentiate themselves by betting as much as possible against competitors. The welfare loss that quacks inflict on patients is robust to market interventions which would crowd out low-quality firms in a standard I.O. model. I discuss the implications of these findings for a variety of industries, including forecasting and mutual funds.
Keywords: Bounded rationality, Industrial organization, Competition, Charlatans, Quacks, Law of small numbers, Mutual funds
JEL Classification: D4, D8, L1
Suggested Citation: Suggested Citation