When Reputation Matters - Exploring Experience and Credence Goods
Economists classify goods into one of 3 categories: Search, Experience and Credence.
Let's go through each of these in turn.
Search Goods are goods with attributes that can be evaluated prior to purchased or consumed. Most products — e.g. clothing, furniture, office stationery fall into this category, although certain aspects e.g. durability, quality must be experienced so people may still find reviews and recommendations valuable here in some cases.
Experience goods — are goods that can be accurately evaluated only after the product has been purchased and experienced. Many services and experiences e.g. restaurant, hairdresser, theme park fall into this category, and reviews and recommendations are especially valuable here, hence the enduring value for review aggregators like Google, Yelp and TripAdvisor.
Credence goods — are goods that are difficult to evaluate even after consumption has occurred, often because the consumer lacks the knowledge, experience or technical expertise to make an effective evaluation. Many professional services such as medical, legal, financial services or technical services such as mechanics fall into this category.
Credence goods are often especially difficult for consumers as they are often the most costly and have the most at stake — choosing a poor realtor, lawyer or doctor can be stressful, financially ruinous and possibly even dangerous. In high stakes decisions involving credence goods, consumers grasping at straws look at any indicators they can get — with price and salesmanship often sealing the deal. A customer reasons that the high priced, charismatic lawyer, the dentist with the glittering clinic, and the realtor driving the Maserati has to be the best, right? In this environment, every service provider, whether good or bad, charges a high price and consumers are helpless to easily discern between the two. Complicating this is that several credence goods, due to their high cost, are rarely purchased and experienced by the consumer (how often does the typical person buy a house or get a root canal).
How, then, do canny people make their decisions regarding credence goods? The most common and reliable method is to trust the judgment of an expert in the field. As the saying goes, ‘game recognize game' and the word of a trusted friend with expertise in a field is likely to yield good results. The more experienced the recommender, the more confidence we have in our decision. When it comes to credence goods, who the recommendation comes from is as critical as what the recommendation is.
As an example — one of the best experiences I had was in finding a dentist in India on the recommendation of a dentist friend when I needed extensive (and expensive!) work done. Contrast that to my terrible experience finding and using a US-based dentist during the COVID pandemic — read more about this here.
But what if one doesn't know an experienced expert in a field that they urgently need? While review aggregators like Google and Yelp are available, will you really trust the words of random internet strangers when deciding who to trust with the lifesaving surgery for your loved one? This is one of our major motivators for creating MyCircle — to develop and expand our user's professional network so they have honest and credible sources for those decisions that matter most.
