The starting point of this task is to analyze how markets may develop mechanisms to mitigate problems of quality uncertainty in experience goods markets and the role of legal rules as well as the scope of governmental regulation for improving market efficiency. Moreover building on the insights from the theory of dynamic pricing decisions under learning, we will study firms’ incentives for product innovation in experience good markets with quickly evolving technology – e.g. software or internet content.
The analysis should be helpful in explaining why consumers are frequently unhappy with changes in the software or internet services they use, and in developing appropriate regulatory instruments. Finally, we will study whether information about beliefs matters for the way firms and consumers make their decisions. Specifically, we will investigate how the potential attractiveness of collusion is altered when information among competitors is asymmetric and no common prior belief in markets with incomplete information exists.
In addition to experience goods markets, this sub-project will examine how the consumers' information acquisition influences experts’ advice. While previous literature seriously restricts the information acquisition process we will model the consumers’ information acquisition endogenously.
This will allow us to examine whether ornot regulators should encourage consumers’ information acquisition and which pieces of information consumers find most useful. Furthermore, many economic choices are made after deliberation in groups. Experimental evidence shows that agents can be sophisticated in anticipating the consequences of their messages.
Similarly, receivers of messages typically learn quickly about their informativeness. However, it is natural to expect that biases – incentives to miscommunicate – will reduce the effectiveness of communication. We will investigate theoretically and experimentally whether larger communication networks create differential reasons for such biases. In particular, we will provide experimental evidence on the effect a specific “behavioral” motive in communication: vanity. If the expert is observed by an increasing number of agents, she may find it more and more important to show how well informed she is. Caused by her ego utility, she may have a bias towards making stronger statements. The receivers may, however, understand this bias and therefore discount the informativeness of the expert’s messages. Overall, communication may be heavily hampered by vanity.