Empirical Industrial Organization, Spring,2011
Empirical Industrial Organization of Credence Goods and Experts
Traditional IO
Since Cournot and Bertrand, IO has been focused upon the economic analysis of imperfect competition among manufacturers. Manufacturers, until recently, have been at the heart of most developed economies.
New Economy of Experts
In the last 30 years, there has been a great shift in developed economies to the service sector. In the last 10 years, there has been a further shift to the information service sector. In particular, more and more of the economy is now influenced by or controlled by experts. In light of this trend and the anticipation that you will be entering this economy, the focus of my course will be on the imperfect competition among experts and their firms. Some examples of what I mean by experts are doctors, lawyers, accountants, investment banker, credit rater, management consultants, movie rater, professors, priests, astrologists, and in China, Fengsui masters. The last two years has shown that many financial products such as ARMs, CDOSs are also credence goods and that these markets also suffer from an expert problem. What characterizes this area of the knowledge economy are gross asymmetric information between experts and the consumers of their services. As products get more technical, the expert issue of sellers dealing with less well informed consumers becomes more important for all parts of IO. When the consumer can assess the quality of a product even after consumption, the “expert problem”/ or “credence good problem” arises. A product is called a credence good, when you must trust that the seller is providing the correct quality.
Credence Goods and Expert Problems in China
These problems have become important to China due to corruption and underdevelopment of the system of regulation and certification for the health and safety of products. Some examples of recent scandals are: lead in toys, antifreeze in toothpaste, toxic chemicals in dry wall, poisoned milk and baby foods, poor construction quality which caused buildings to collapse in recent earthquakes and of course, counterfeit products. The China brand was badly damaged during these scandals so that westerners and Chinese alike tend to mistrust products from China. Without such trust, there won’t be a market for high quality products and services from China. We will consider attempted solutions in the west, which may open the way for solutions for China.
Objectives of the Course
We will form more of a research group than teach a course. My role is to bring you up to speed on the expert literature by giving you a broad overview of the major issues. Your role is to find a field that is of particular interest to you, become an expert in it enough to teach the rest of us, and present a research proposal. Along with greater practice of English, you should also come out of this course with a improved ability to apply current research to the expert problems you may face in your careers.
Other than the papers that we will produce on specific research questions, with your help, I am hoping to compile the material for a book on experts. Your contribution will be acknowledged in the book.
Prerequisites
I don’t have a formal pre-requisites. You need to choose papers and a topic which makes use of your special background.