The Economics of Advice

A consumer wants to buy one of three different products. An expert observes which of the three products is the best match for the consumer. From his knowledge of costs and the observation of prices, the consumer can infer the expert’s incentives. Under linear prices a monopolistic expert may truthfully reveal, may partially reveal, or may not reveal at all her information. The outcome is inefficient; moreover, the consumer gets some of the surplus. With a two-part tariff the expert truthfully reveals her information. The outcome is efficient, and the expert appropriates the entire surplus. If experts are competitive, they also truthfully reveal; here all of the surplus goes to consumers.