DP6135 Pricing and Trust

Author(s): Steffen Huck , Gabriele K. Ruchala , Jean-Robert Tyran

Publication Date: February 2007

Keyword(s): experience goods , markets , moral hazard , price competition , reputation , Trust

JEL(s): C72 , C90 , D40 , D80 , L10

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6135.asp.asp

We experimentally examine the effects of flexible and fixed prices in markets for experience goods in which demand is driven by trust. With flexible prices, we observe low prices and high quality in competitive (oligopolistic) markets, and high prices coupled with low quality in non-competitive (monopolistic) markets. We then introduce a regulated intermediate price above the oligopoly price and below the monopoly price. The effect in monopolies is more or less in line with standard intuition. As price falls volume increases and so does quality, such that overall efficiency is raised by 50%. However, quite in contrast to standard intuition, we also observe an efficiency rise in response to regulation in oligopolies. Both, transaction volume and traded quality are, in fact, maximal in regulated oligopolies.