Economics Webinar - Consumer-Optimal Information Design under Credence Good Monopoly

This paper studies buyer-optimal information design in a monopolistic credence-good environment à la Fong (2005). In this setting, the seller determines service prices and recommendations, while the information designer chooses an information structure, generating a private signal for the buyer about her service needs. Upon observing the information structure, the seller posts a price list for his services. Subsequently, the seller makes a treatment recommendation after diagnosing the buyer’s problem. Then, the buyer decides whether to accept the recommendation based on her private signal and the seller’s recommendation.  Our study shows that i) perfect information or no information results in zero consumer surplus, ii) any signal structure promoting honest service recommendations inevitably leads to zero consumer surplus, and iii) the buyeroptimal signal structure prompts the expert to consistently recommend the expensive services, resulting in undertreatment for less severe problems. This exercise sheds light on the inherent limitations of information provision in mitigating the dual advantages wielded by the seller in pricing and information.