Credence Goods, Consumer Feedback and (in)Efficiency

ABSTRACT

We study how consumer feedback affects a credence good market where consumers sequentially visit a monopolistic expert. Each consumer's problem can be minor or major. Before treatment, the expert performs a diagnosis which may fail. Each consumer reveals the received treatment and its outcome. Consumers observe feedback history and decide whether to visit the expert. We find that consumer feedback can lead to inefficiency. When diagnosis fails, the expert overtreats consumers even though the probability of a major problem is low. This behavior does not arise without consumer feedback.