
Credence Good
A credence good is a type of good with qualities that cannot be observed by the consumer after purchase, making it difficult to assess its utility. Michael R. Darby and Edi Karni coined the term credence goods and added it to Phillip Nelson’s (1970) classification of ordinary, search, and experience goods. Credence goods often exhibit a direct relationship between price and demand, similar to Veblen goods, when the price is the only possible indicator of quality. This kind of problem is known as overcharging, and can also lead to inefficiencies in the long run if the fear of getting overcharged deters consumers from trading on credence goods markets in the future, thereby creating an Akerlof-type of market breakdown. A credence good is a type of good with qualities that cannot be observed by the consumer after purchase, making it difficult to assess its utility. Credence goods are goods whose qualities cannot be ascertained by consumers even after purchase.

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What Is a Credence Good?
A credence good is a type of good with qualities that cannot be observed by the consumer after purchase, making it difficult to assess its utility. Typical examples of credence goods include expert services such as medical procedures, automobile repairs, and dietary supplements.



Understanding Credence Goods
Credence goods are part of the Search, Experience, Credence (SEC) classification used by economists and marketers. Credence goods that do not perform as expected can have adverse consequences, ranging from financial loss to ill-health and even death.
For example, the U.S. Food & Drug Administration (FDA) has, over the years, prohibited a number of dietary supplements from being marketed, either due to misleading advertising claims by their manufacturers, or because they could induce serious side effects. Michael R. Darby and Edi Karni coined the term credence goods and added it to Phillip Nelson’s (1970) classification of ordinary, search, and experience goods.
Credence goods often exhibit a direct relationship between price and demand, similar to Veblen goods, when the price is the only possible indicator of quality. This might result in a situation where price becomes the determining factor for quality and less expensive products are suspected to be of poor quality and avoided.
For instance, a restaurant customer may avoid the cheapest steak on the menu in favor of one more expensive. After eating it, the customer will still be unable to evaluate the relative value of the steak compared to the other cuts of steak on the menu they have not tried.
Credence Goods Issues
Information about a good typically plays an important role in determining its worth. In theory, the more a consumer knows about the innate qualities and characteristics of a good, the better they will be able to determine its worth. Credence goods, however, suffer from information asymmetry.
The inequalities found between the information known by the buyer and seller in credence goods markets bring about inefficiencies that attract significant public scrutiny. As an example of a credence good, consider a motorcyclist bringing a motorcycle to a mechanic for repair. The mechanic — as an expert seller — could have a reason to cheat the consumer on two fronts.
- First, the repair might be inefficient. The mechanic might replace more parts than are actually necessary to bring the car back on the road (and charge for the additional parts and labor). This type of case is referred to as overtreatment because the additional benefits to the consumer are smaller than the additional costs. The mechanic’s repair might also be insufficient, thus leaving the consumer with a bill, but with a motorcycle that isn't roadworthy. This type of situation would be referred to as undertreatment since any material and time spent on the repair is pure waste.
- Second, the repair might be appropriate, but the mechanic might charge the consumer for more than has actually been done (such as claiming to have changed an oil filter without having done so). This kind of problem is known as overcharging, and can also lead to inefficiencies in the long run if the fear of getting overcharged deters consumers from trading on credence goods markets in the future, thereby creating an Akerlof-type of market breakdown.
According to research, there are two drivers for car repair shops to overcharge customers.
- The first one is the existence of less competition. More competition from similar repair shops enables consumers to consult other shops and compare prices.
- The second incentive for mechanics to overcharge is a financial crisis within their business.
Examples of Credence Goods
The healthcare industry is an example of a credence good.
There are two components to healthcare: physician service or demeanor and the technical aspect that consists of medical evaluations and prescriptions. A majority of patients have knowledge of and can evaluate physicians regarding the first component but they find it difficult to evaluate or quantify the second component because it requires specialized knowledge of the methods and practice of medicine. Patients mostly find it difficult to dispute a medical practitioner's prescription without assistance.
Education is another industry that is an example of a credence good.
Related terms:
Asymmetric Information
Asymmetric information occurs when one party to a transaction has more or superior information compared to another. read more
Economics : Overview, Types, & Indicators
Economics is a branch of social science focused on the production, distribution, and consumption of goods and services. read more
What Is an Economist?
An economist is an expert who studies the relationship between a society's resources and its production or output, using a number of indicators to predict future trends. read more
Health Maintenance Organization (HMO)
A health maintenance organization (HMO) is a health insurance plan that provides health services through a network of doctors for a monthly or annual fee. read more
Inflation
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more
Kiosk
A kiosk is a small, standalone booth used in high foot traffic areas for marketing purposes. Kiosks can be electronic or staffed with employees. read more
Monopoly
A monopoly is the domination of an industry by a single company, to the point of excluding all other viable competitors. read more
Price Transparency
Price transparency typically refers to the accessibility of information on the order flow for a particular stock. read more
Search Cost
Search cost is the time, energy, and money expended by buyers and sellers in trying to find one another. read more