Question

More than 100 small companies provide house-painting services and all of them advertise “First

Class Quality”. Homeowners know, however, that painters can easily substitute low-quality for

high-quality paints and that the homeowner won’t discover which quality was used until the paint

ages, years after the painter has been paid. Moreover, painters go in and out of business and

change the names of their companies frequently. Painters charge about $5,000 to paint a typical

house. Experts estimate that doing a really high quality job would cost fully $10,000 for the

typical house but it would last three times as long. By tradition, no painting company offers

guarantees (partly because they come and go so frequently).

a) Despite all of the complaining, no painting services are offered for more than $5,000. How do

you explain this outcome?

b) A new paint company advertises high-quality work for $11,000 and it offers a 10-year

guarantee on the work backed up by an independent bank. Do you think the new company will

be able to get any business? Explain your answer.

Answer 1

a). Given that owners cant judge before hand the quality of painting. So even if there is a genuinely good painter even then owners wont be able to trust him. For them all the painters are the same as their is no way to segregate good from bad. So they wont pay anything above going rate of 5000. Similarly the good painters know they wont get right value of their work, which as experts suggested is 10000. So good painters would leave the market. Even if they stay , they wont be able to charge more than 5000. All this is because there is lack of information with the owners about the quality of painter.

b). If the company give 10 year warranty then this could provide information to the owners that work would be of good quality. If it lasts 3 times longer than usual work then for the owner 11,000 would be lesser than 3*5000. so the new business would attract customers for sure.