Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice

We analyze a market where the consumer must rely on experts to identify the correct type of service. Medical services, repair services and various types of consulting and advisory services belong to this broad category. Our focus is on situations where the diagnosis of the consumer’s needs is costly and the expert’s effort is unobservable. We develop a model where experts offer competing contracts and the consumer may gather multiple opinions. We explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and Þnd that there is a tension between price competition and the quality of the advise provided in equilibrium. The equilibrium fails to realize the second best welfare optimum. On the other hand, limiting price competition via price control increases total welfare.