Miscounseling in Monopolistic Competition: A Case for Regulation

We analyze the impact of (possibly) fraudulent independent experts in a market for credence goods characterized by monopolistic competition. This setting applies to various industries such as repair markets, health care markets or financial services markets where consumers are usually uninformed about which product best fits their individual needs. Some consumers prefer to use an expert. We analyze market outcomes with honest and fraudulent experts, whereby honesty may require side payments from firms to experts. Rigorous regulation of the relationship between firms and experts may be essential in order to make these markets operate more efficiently.