The evolution of credence goods: A transaction approach to product specification and quality control

Executive summary 1. Most traded goods have important qualities which cannot be revealed by inspection or ordinary use. These qualities, which are difficult or impossible to detect but which nevertheless play a role for the buyer, are called credence characteristics. Credence goods are goods for which the buyer's decision-making is dominated by concerns about credence characteristics. 2. Credence goods show an asymmetry between seller and buyer with respect to knowledge acquisition. Therefore, there is a need for the buyer to combine the quality claims of the seller with information about the credibility of these claims. The credibility depends on the seller's credentials, ie, an undisputed record of honesty, competence and determinedness with respect to the quality of supply. 3. There are three major types of credence characteristics. The first type of credence characteristics covers the 'hidden' qualities of a specimen of a good. Among such characteristics, the most conspicuous are the ones which relate to aspects of the production process (like free-range pigs). In the second case, each specimen is supposed to live up to a large set of minimum standards which – especially as a whole – are very difficult to test for the buyer. In the third case, a specimen is considered to represent a brand which has important probabilistic characteristics. 4. The development of characteristics of individual products can be modelled in terms of a quality life cycle. Initially, the characteristic is subject to much interest among buyers and sellers, but the end result is a minimum standard with respect to the particular characteristic. This minimum standard is added to the other minimum standards which characterise the particular product. Products with a long history (like many food products) have shown developments which include large numbers of individual quality-characteristic life cycles. 5. The market-level evolution of probabilistic credence characteristics can be modelled as an interplay between consumers and retail chains with complex portfolios of products. These products are described in terms of their probability of 'breakdown', ie, the probability that they are unsatisfactory to be buyer. The buyers' learning about and reaction to breakdowns are specified in a way which makes it rational for the retail chains to obtain a certain degree of uniformity with respect to the breakdown qualities of the different products. The retailers are also interested in removing the buyers' over-evaluation of the breakdown probability of their products and in reacting promptly in the case …