The Good, the Bad and the Naive: Do Fair Prices Signal Good Types or Do They Induce Good Behaviour?

  • Date:

    May 24, 2012

  • Author:

    Uwe Dulleck, David Johnston, Rudolf Kerschbamer, Matthias Sutter

  • Speaker:

    Prof. Uwe Dulleck (Queensland University of Technology)



Experimental evidence on behavior in markets for credence goods indicates (i) that fair prices are associated with more consumer-friendly behavior than other prices; and (ii) that experts are heterogeneous in their preferences and expectations. Given (i) and (ii) a causality issue arises: Do "fair prices" induce "good behavior", or do "good experts" post "fair prices"? To answer this question we test in new experiments an equilibrium model with three types of sellers: "the good" choose fair prices and behave in a consumer-friendly manner; "the bad" mimic the good in their price-setting behaviour but take advantage of customers; and "the naive" fall victim to a projection bias. OLS, sample selection and fixed effects regressions support each of the model's predictions and clearly confirm the hypothesis that the direction of causality goes from good experts to fair prices. We discuss policy implications.