Experience goods are products and services whose value can only be truly determined by consuming or experiencing them. A bottle of wine is the classic example of an experience good, health care and beauty products are also frequently cited. Experience goods are typically purchased based upon reputation and recommendation since physical examination of the good is of little use in evaluating its quality.
Credence goods are products and services, such as vitamins or frequent oil changes, whose value can never really be known with certainty. To a large degree, the value of a credence good is often a matter of faith or belief. Maybe it worked, maybe it didn’t. Hard to know, hard to be sure. Maybe it prevented a bad thing from happening, maybe it wouldn’t have happened anyway.
A search good is any product whose quality is readily observable prior to purchase. A single product may comprise elements of all three: the wear on the tires of a used car may be evident (search good) while the quality of the engine may be much more difficult to ascertain, requiring you to rely upon the reputation of the manufacturer or prior owner (credence good).
Both experience goods and credence goods tend to experience less price competition due to the fear that a low price may indicate unobservable problems or a lack of quality.
“Caveat emptor: Let the buyer beware.” — Proverb
“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” — Will Rogers
“Whoever said money can’t buy happiness simply didn’t know where to go shopping.” — Bo DerekDownload as PDF