Are you a doctor or a Quack? Provision of quality and self-regulation in a market for professional services

This paper aims at analysing the behaviour of sellers in a market for an experience good where it is not feasible to credibly signal quality through prices. Due to a different level of the initial investment in human capital, firms are distinguished into low-type and high-type ones. Along the lines of Bagwell and Riordan, (1986), and Gehrig and Jost, (1995), it is assumed that consumers may migrate after the first time period. The novelty of this paper is that the probability of migration is endogenized being dependent on producers’ types. We find that with asymmetric information, both low-type and high-type firms choose an optimal quality strictly lower than under full information. Under quite general conditions equilibrium profits and consumers’ welfare are reduced too. It is therefore reasonable that producers face an incentive to improve upon this equilibrium. A Self-Regulating Organisation (SRO) is introduced with the aim of setting a common minimum quality standard. A SRO represents a selfenforcing credible mechanism if there is an incentive for each member to punish eventual deviant members. It is found that a SRO is always enforceable for lowtype firms, provided there is consumers’ mobility, while it is such for high-type firms if the population of sellers is not too heterogeneous in terms of skill levels.