Product Testing in Markets for Experience Goods

Description

We study a product testing institution within a market for experience goods. Buyers can buy the good immediately, leave the market without buying, or pay a cost to get a noisy signal about the quality of the seller with whom they are matched. We show the existence (for some parameter constellations) of a mixed perfect Bayesian equilibrium in which sellers provide high quality with a positive probability and buyers mix between buying immediately and acquiring information. The mixed equilibrium is more efficient than the equilibrium without institutions, in which all sellers provide low quality and all buyers leave the market. The existence of the mixed equilibrium depends on the precision and cost of the signal. We test the comparative statics of our model in the laboratory by varying the precision and the cost of the signal as a treatment condition.

Period	2 Sept 2015 → 5 Sept 2015
Event title	Economic Science Association European meeting
Event type	Unknown
Degree of Recognition	International