Product Testing in Markets for Experience Goods

Description

We examine the effectiveness of a product testing institution in a market for experience goods where reputation formation is not feasible. In our setup, sellers commit ex ante to a quality level (high or low). Buyers can - in addition to buying immediately and leaving the market - pay a fee to get a noisy signal about the quality chosen by the matched seller. We show the existence of a mixed perfect Bayesian equilibrium in which sellers provide high quality with positive probability, while buyers mix between buying immediately and acquiring information. We vary the cost of the signal such that the mixed equilibrium exists in a low-cost treatment but not in a high-cost treatment. The experimental results show that the low-cost signal improves efficiency, but not to the extent as predicted by theory. Surprisingly, the high-cost signal - which is predicted to have no effect - also improves efficiency compared to a control treatment where no signal is available.

Period	6 Oct 2017 → 9 Oct 2017
Event title	European meeting of the Economic Science Association
Event type	Unkonwn
Degree of Recognition	National