The Economics of Credence Goods: How Unverifiable Services Thrive in Modern Markets

In the sprawling consumer marketplace, some goods and services are notoriously difficult to evaluate. These are called credence goods. The products have characteristics whose value consumers cannot accurately determine, even after they have consumed them. There are two especially relevant examples of industries that continue to be very profitable, even in the face of ongoing debate as to whether or not they are effective at all: homeopathy and psychic readings. Understanding the economics driving the demand for these services provides a good insight into consumer behavior and market dynamics. ​

Defining Credence Goods

These are products or services whose utility or quality is hard for consumers to ascertain both before and after consumption. Unlike search goods (e.g., clothing), the quality of which can be evaluated before purchasing, or experience goods (e.g., dining), upon consumption, credence goods leave consumers reliant on the provider’s expertise or claims. This dependence often fosters information asymmetry, where the seller knows more about the value of their products than the buyer does. ​

Homeopathy as an Example of Credence Goods

Homeopathy is based on principles such as “like cures like” and the administration of highly diluted remedies—and other specific protocols. Regardless of the lack of any empirical evidence supporting effectiveness (as it shows in UK’s report “Evidence Check 2: Homeopathy”), the homeopathy market is blooming worldwide. India is one example of this, where homeopathy has become fairly popular, possibly due to cultural acceptability and frustrations with mainstream medicine. A study examining its rise in India notes that “medicine is a pharmaceutical industry which unfortunately is money-oriented”, and argues that alternative treatments like homeopathy offer a sense of personalized care that is absent from mainstream health care. ​

The Art of Psychic Reading

Psychic readings—tarot card readings, astrology readings, clairvoyant readings—are classic credence goods. Psychic readers have embraced the digital age and began offering such services on platforms like Nebula. There are various categories of psychic reading from which to choose on Nebula—tarot spreads, love and relationship counsel, numerology, palm reading, etc. The sector has exploded in the past decade, even as experts have questioned their efficacy; annual revenue—has reached almost $2 billion in recent years.

Economic Driving Forces Behind Demand

There are a number of competing economic and psychological reasons for the persistence of demand for credence goods like homeopathy and psychic reading:

The demand for credence goods such as homeopathy and psychic readings persist, owing to a number of economics and psychology factors:

Information Asymmetry: Consumers do not know how to assess the effectiveness of these services, so they rely on providers’ claims. ​ 

Perceived Value and Placebo Effect: An individual's perceptions of a treatment or service can carry over into real or apparent benefits, leading to its continued use. ​

Cultural and Social Influences: People are more likely to seek these services in areas where alternative medicine or spiritual practices have a longstanding historical presence. ​

Dissatisfaction with Conventional Options: Consumer disillusionment with mainstream medicine or a desire for holistic approaches can push consumers toward alternative solutions. ​

Ramifications and Policy Considerations

Since credence goods are ubiquitous in the marketplace, there are a few complications/points to consider: 

Consumer Protection: Providers can exploit this relationship by exaggerating benefits or charging for services that do not work. On the one hand, regulators have to respect individual decisions, although, they need to limit consumers’ exposure to fraudulent practices. ​ 

Healthcare Implications: Avoiding effective medical treatments for unproven remedies—like homeopathy—could lead to individuals foregoing useful medical care, and is a public health risk. ​

Economic Impact: Revenue generated by these “industries” highlight important consumer resource allocation that may potentially be spent on empirically supported services. ​

Conclusion

Like other credence goods—homeopathy, psychic readings, and so on—the enduring appeal of homoeopathic-actions is a reminder of how consumer psychology, cultural norms, and market dynamics can interact to undermine the efficacy of market forces. These services may seem helpful on the surface, and many feel that they provide value, but they also serve as reminders of the need for critical thinking and informed choices. These new industries are still evolving, and you need to understand these principles, be it as a consumer or policy maker.