Featured Research

from universities, journals, and other organizations

Social welfare may fall in a more ethical market

Date:
August 25, 2014
Source:
Institute for Operations Research and the Management Sciences
Summary:
For 'credence services' such as auto-repair, health care, and legal services, the benefit to the customers for the service is difficult to assess before and even after the service. A new study finds that in a credence services market, when more service providers care about the customer's well-being, society as whole may actually be worse off.

For "credence services" such as auto-repair, healthcare, and legal services, the benefit to the customers for the service is difficult to assess before and even after the service. A new study in a journal of the Institute for Operations Research and the Management Sciences (INFORMS) finds that in a credence services market, when more service providers care about the customer's well-being, society as whole may actually be worse off.

The study titled, "Signaling through Pricing by Service Providers with Social Preferences," is by Baojun Jiang (Washington University in St. Louis), Jian Ni (Johns Hopkins University) and Kannan Srinivasan (Carnegie Mellon University). This study appears in the Articles in Advance section of Marketing Science.

For example, when an auto mechanic tells a customer to make some repairs, the average customer is unable to discern the veracity of the recommendation. The risk of not doing repairs is unknown until a breakdown, if any, occurs. But if repairs are undertaken, their value may never be known.

The authors develop an analytical model to study such a credence service market with two types of service providers. One type is purely self-interested and focuses on maximizing its own profit. In contrast, the other type, the ethical provider, has social preferences and cares about the customer's well-being in addition to its own profit.

The prior common belief was that society as a whole would always be better off when service providers are ethical and have social preferences. The authors of the article show just the opposite.

Professor Jiang explains, "For a provider with social preferences, the optimal strategy that maximizes the combination of its profits and social satisfaction is to charge a uniform price and provide services to all consumers."

Consumers typically do not know for sure whether a service provider is purely profit-maximizing or has social preferences. So customers would actually be willing to accept a higher uniform price from a provider with social preferences than from a purely profit-maximizing provider. Why? Because the provider with social preferences will provide service to all consumers at the uniform price even if a customer's condition will impose a higher service cost than the price, since the provider also derives satisfaction servicing the customer. On the other hand, a purely profit-maximizing provider would offer service only to low-cost customers (those who make normal demands on the provider) and dump high-cost, demanding customers. So, the consumer who does not know his or her exact condition (i.e. high or low cost) would be more likely to accept a higher uniform price with the assurance of not being dumped.

Then again, the authors ask, how can society as a whole be worse off when more service providers have social preferences? As Professor Jiang explains further, when more providers have social preferences, their optimal uniform price increases, which gives the purely profit-maximizing provider more of an incentive to mimic that uniform price. When the profit-maximizing provider rejects high-cost customers for service, there is a social loss because the value of the service to these customers may still be higher than the provider's cost. In contrast, when a smaller fraction of providers have social preferences, the purely profit-maximizing provider will have less incentive to mimic the uniform pricing policy and will actually prefer charging different prices based on the customer's cost.

Since the consumer does not know his or her condition, the customer, out of concern that the provider may be lying, will sometimes reject service when the provider charges the high price.

The authors show that the customer's probabilistic rejection of the profit-maximizing provider's service may actually be better for the society as a whole than the profit-maximizing provider's definite dumping of high-cost customers. That is, when more providers have social preferences, fewer consumers may be served due to the profit-maximizing provider's dumping of high-cost customers. One lesson for policy makers and regulators is that passing laws requiring uniform pricing in a credence services market may not be socially desirable.


Story Source:

The above story is based on materials provided by Institute for Operations Research and the Management Sciences. Note: Materials may be edited for content and length.


Journal Reference:

  1. Baojun Jiang, Jian Ni, Kannan Srinivasan. Signaling Through Pricing by Service Providers with Social Preferences. Marketing Science, 2014; 140407101921007 DOI: 10.1287/mksc.2014.0850

Cite This Page:

Institute for Operations Research and the Management Sciences. "Social welfare may fall in a more ethical market." ScienceDaily. ScienceDaily, 25 August 2014. <www.sciencedaily.com/releases/2014/08/140825130311.htm>.
Institute for Operations Research and the Management Sciences. (2014, August 25). Social welfare may fall in a more ethical market. ScienceDaily. Retrieved October 20, 2014 from www.sciencedaily.com/releases/2014/08/140825130311.htm
Institute for Operations Research and the Management Sciences. "Social welfare may fall in a more ethical market." ScienceDaily. www.sciencedaily.com/releases/2014/08/140825130311.htm (accessed October 20, 2014).

Share This



More Science & Society News

Monday, October 20, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Your Birth Season Might Determine Your Temperament

Your Birth Season Might Determine Your Temperament

Newsy (Oct. 20, 2014) A new study says the season you're born in can determine your temperament — and one season has a surprising outcome. Video provided by Newsy
Powered by NewsLook.com
How Nigeria Beat Its Ebola Outbreak

How Nigeria Beat Its Ebola Outbreak

Newsy (Oct. 20, 2014) The World Health Organization has declared Nigeria free of Ebola. Health experts credit a bit of luck and the government's initial response. Video provided by Newsy
Powered by NewsLook.com
Ebola Worries End for Dozens on U.S. Watch Lists

Ebola Worries End for Dozens on U.S. Watch Lists

Reuters - US Online Video (Oct. 20, 2014) Forty-three people who had contact with Thomas Eric Duncan, the first person diagnosed with Ebola in the U.S., were cleared overnight of twice-daily monitoring after 21 days of showing no symptoms. Rough Cut (no reporter narration). Video provided by Reuters
Powered by NewsLook.com
Would A Travel Ban Even Work In Stopping Ebola Spread?

Would A Travel Ban Even Work In Stopping Ebola Spread?

Newsy (Oct. 19, 2014) The U.S. currently isn't banning travel from Ebola-stricken areas, but it's at least being considered. Some argue though it could be counterproductive. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins