No. 2003–26 CONSUMERS AND EXPERTS: AN ECONOMETRIC ANALYSIS OF THE DEMAND FOR WATER HEATERS

Consumers can accumulate product information on the basis of a combination of searching, product advertising and expert advice. Examples of experts who provide product information include doctors advising patients on treatments, motor mechanics diagnosing car problems and recommending repairs, accountants recommending investment strategies, and plumbers making recommendations on alternative water heaters. In each of these examples, the transactions involve the sale of goods and services where the seller is at the same time an expert providing advice on the amount and type of product or service to be purchased. In the case of water heaters, the plumber advising a consumer on their choice of water heater will most likely also install the appliance. Because of the information asymmetry there is potentially a strategic element in the transmission of information from expert to consumer. This paper reports on an econometric investigation of the factors that determine the choices made by consumers and the recommendations made by plumbers and the extent to which plumbers act in the best interests of their customers. The empirical work is made possible by the availability of stated preference data generated by designed experiments involving separate samples of Australian consumers and plumbers. We find some evidence that plumbers have higher preferences than consumers for heater characteristics that increase their profit margin. JEL Classification: C35, L84 * This research was supported by the Australian Research Council through a grant, and through the MEMLAB and Sydney VisLab computing facilities. Benedict Dellaert was heavily involved in the initial conceptualization of this project. His input is gratefully acknowledged. The project has benefited substantially from the technical advice and experience provided by John Clarke and Jordan Louviere and from the excellent research assistance of Adam McCabe and Bernard Conlon. Beneficial comments have been received from attendees of the Industry Economics Conference held in Melbourne 2001, the Australasian Econometric Society Meeting held in Auckland 2001 and seminar participants at the University of New South Wales, Melbourne University, Tilburg University, University of Newcastle (UK) and Dortmund University.