Peter Wagner, University of York

"The Hidden Cost of Cheap Advice"


In this paper, we investigate monopoly pricing in the presence of an expert who receives a benefit from providing a buyer with information about the quality of the seller's product. We demonstrate that the expert is advantageous to the buyer only when the cost of seeking advice is not too low. When the buyer faces a moderate cost of obtaining information from the expert, the seller 'prices out' the expert by offering discounts to dissuade the buyer from seeking advice. This approach generates a positive surplus for the buyer. In contrast, when the buyer's cost is low, the seller 'prices in' the expert, capitalizing on the buyer's easy access to information to demand a premium. We also show that the seller and intermediary may benefit from tacit collusion and direct payments in pricing-out equilibria but never in pricing-in equilibria.

Joint with Bojia Li

Contact person: Julia Salmi