Experience and Credence Goods - An Introduction

Abstract

The basic economic force is the specialization of tasks and the division of work. As a consequence, the economic actors as firms, institutions and people exchange goods, services and tasks. In a free society, a transaction takes place if there are gains from trade, and both involved actors expect an improvement of their utility. Suppliers sell their goods and services as long as the price is higher than the costs. Consumers will buy the goods, as long as the expected utility is higher than the price. In general, consumers compare between goods with different prices and attributes. Firms employ workers with different skills at different wages. Information about the products’ prices and costs may be more ore less easy to get, at least for the supplier. The detection of the product’s attributes may be more difficult. Especially, at the time of the transaction, some of the attributes of the product or task are not exactly known by one or both of the actors. This lack of information of the product quality and attributes influence the transaction behavior and the market structure. However, transactions may take place also in such situations. What is the basis of decision making used by the actors in such transaction situations? How are additional information sources like a signal or a third opinion introduced in the actors’ decision problem? What are the supplier’s incentives and possibilities to reveal the information? This issues on consumer behavior and information asymmetries are introduced in Nelson (1970) and Darby and Karni (1973). Based on these pathbreaking articles, Andersen and Philipsen (1998) outline the goods characteristics in three categories:

• Goods with search characteristics feature low pre-buying costs of quality detection. Hence, the buyer can learn by comparing and inspecting the goods’ attributes before buying. Examples for such goods are clothes, footwear, furniture, cameras, and food

• Goods with experience characteristics feature high pre-buying costs of quality detection. Hence, the buyer learns the product’s attributes after buying and consuming. The post-buying costs of quality detection are low for such goods. This information can be used for further consumption of the product. Examples for such goods are jobs, hotels, newspapers, music records and movies, wine, restaurants, food

• •|Goods with credence characteristics feature high pre-buying costs and high post-buying costs of quality detection. The utility cannot be exactly determined even after consumption. Examples for such goods are health services, legal advices, and child day care, religious and spiritual guidance