Credence good

From Wikipedia, the free encyclopedia

A credence good is a term used in economics for a good whose utility impact is difficult or impossible for the consumer to ascertain. In contrast to experience goods, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information. Examples of credence goods include;

Vitamin supplements
Education
Car repairs
Many forms of medical treatment
Home maintenance services, such as plumbing and electricity.
Estate agents

[edit] Psychology of credence goods

Credence goods may display a direct (rather than inverse) relationship between price and demand, similar to Veblen goods, when price is the only possible indicator of quality. The least expensive products might be avoided in order to avoid suspected fraud and poor quality.

A practical application of this principle would be for competing job applicants not to propose too low a wage when asked, lest the employer think that the employee has something to hide or does not have the necessary qualification for the job.

In an unregulated market, prices of credence goods tend to converge, i.e. the same flat rate is charged for high and low value goods. The reason is that suppliers of credence goods tend to overcharge for low value goods, since the customers are not aware of the low value, while competitive pressures force down the price of high value goods. ^[1]

Another reason for price convergence is that customers become aware of the possibility of being overcharged, and compensate by favoring more expensive goods over cheaper ones. For example, a customer may ask for a complete replacement of a broken car part with a new one, irrespective of whether the damage is small or large (which the customer doesn't know). In this case the new part is "proof" that the customer hasn't been overcharged ^[1].