Price competition and reputation in credence goods markets: Experimental evidence∗ Preliminary

Experts have better information about the appropriate quality of treatment or surplus from trade than their customers. Providing both diagnosis and treatment, this leaves scope for fraud. In a credence good set-up, we experimentally investigate how intensity of price competition and the level of customer information about past expert behavior in uence an expert's incentive to defraud his customers when the expert can build up reputation. We apply a 2 × 2 factorial design where experts either engage in price competition or operate under regulated prices and customers have information about their own history with the expert or all customers' past histories (private vs. public histories). We show that price competition has a strong impact on fraud: both the level of undertreatment and the level of overcharging are signi cantly higher when experts compete in price than when prices are regulated. We also nd some evidence that the level of undertreatment and the level of overcharging are higher under public than under private histories under price competition while the opposite holds when prices are regulated. Our results indicate that price competition may be detrimental in credence goods markets as it superimposes quality competition. JEL classi cation: D82; L15.