Price competition and reputation in markets for experience goods: An experimental study

We experimentally examine the effects of price competition in markets for experience goods where sellers can build up reputations for quality. We compare price competition to monopolistic markets and markets where prices are exogenously fixed. Although oligopolies benefit consumers regardless of whether prices are fixed or endogenously chosen, we find that price competition lowers efficiency as consumers pay too little attention to reputation for quality. This provides empirical support to recent models in behavioral industrial organization that assume that consumers may, with increasing complexity of the marketplace, focus on selected dimensions of products.