The Market for Quacks

Foerder Working Paper No. 21-03

Posted: 18 Jan 2005

See all articles by Ran Spiegler

Ran Spiegler

Tel Aviv University - School of Economics

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

Spiegler, Ran, The Market for Quacks (January 2005). Foerder Working Paper No. 21-03, Available at SSRN: https://ssrn.com/abstract=643202

Ran Spiegler (Contact Author)

Tel Aviv University - School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

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