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Consumers and experts: an econometric analysis of the demand for water heaters

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Abstract

Consumers can accumulate product information on the basis of a combination of searching, product advertising and expert advice. Examples of experts who provide product information include doctors advising patients on treatments, motor mechanics diagnosing car problems and recommending repairs, accountants recommending investment strategies, and plumbers making recommendations on alternative water heaters. In each of these examples, the transactions involve the sale of goods and services where the seller is at the same time an expert providing advice on the amount and type of product or service to be purchased. In the case of water heaters, the plumber advising a consumer on their choice of water heater will most likely also install the appliance. Because of the information asymmetry there is potentially a strategic element in the transmission of information from expert to consumer. This paper reports on an econometric investigation of the factors that determine the choices made by consumers and the recommendations made by plumbers and the extent to which plumbers act in the best interests of their customers. The empirical work is made possible by the availability of stated preference data generated by designed experiments involving separate samples of Australian consumers and plumbers. We find some evidence that the average plumber’s advice deviates from maximizing utility of the average consumer in a direction that increases the plumber’s profit margins.

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Notes

  1. The design of the SP surveys was carried out by Jordan Louviere. Further discussion of the design principles for SP data collection can be found in Louviere et al. (2000).

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Authors and Affiliations

Authors

Corresponding author

Correspondence to Denzil G. Fiebig.

Additional information

This research was supported by the Australian Research Council through a grant, and through the MEMLAB and Sydney VisLab computing facilities. Benedict Dellaert was heavily involved in the initial conceptualization of this project. His input is gratefully acknowledged. The project has benefited substantially from the technical advice and experience provided by John Clarke and Jordan Louviere and from the excellent research assistance of Adam McCabe and Bernard Conlon. Beneficial comments have been received from attendees of the Industry Economics Conference held in Melbourne 2001, the Australasian Econometric Society Meeting held in Auckland 2001, seminar participants at the University of New South Wales, Melbourne University, Tilburg University, University of Newcastle (UK) and Dortmund University, two anonymous referees and an associate editor.

Appendix

Appendix

Example of choice task for consumer respondents

Scenario # 1

Heater choice # 1

Heater choice # 2

Same as your current heater

Features of water heaters/plumbers

How well you know plumber

New plumber we chose from Yellow Pages

Plumber has these government certificates

Gold licence

Plumber charges manufacturer’s standard rate per hour for installation

Yes

Installation cost is within acceptable range in Choice magazine article

No information in Choice

Yes

Same specifications as your current heater

Type of heater

Electric

Gas

Heater warranty

5 yrs

10 yrs

Capacity compared to the hot water needs of your household

Just enough for your household needs

1.5 times your household needs

Plumber rates this heater for your needs

Excellent

No rating given

Purchase price of water heater

$700

$1100

Same costs and payment as your current heater

Heater running cost (average=$20/month)

$35

$15

Cost of installation for this heater

$450

$250

Heater qualifies for state government Green rebate of 20% off retail price

No

Yes

When is your first payment due if you take a loan

Now

In three months

How you can pay

5% off total cost for cash

Loan at 5% for 12 months

 

Which option would you choose if you must choose one now (Tick ONLY ONE)?

1 I’d choose this one

2 I’d choose this one

3 I’d choose this one

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Bartels, R., Fiebig, D.G. & van Soest, A. Consumers and experts: an econometric analysis of the demand for water heaters. Empirical Economics 31, 369–391 (2006). https://doi.org/10.1007/s00181-006-0052-y

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  • DOI: https://doi.org/10.1007/s00181-006-0052-y

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