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If the gain from consumer surplus from credence goods is large, compared to the opportunity cost of surplus given up from not purchasing conventional goods, the former good would be purchased. Their studies are used as a foundation for the analysis in Chapter 4 of this paper.

Most literature reflects credence goods as vertically differentiated products due to quality differences. Nonetheless, Bester (n.d., in Roe and Sheldon, 2001) provided a concept of unobserved quality into a horizontal differentiation model and suggested that unobserved vertical quality would reduce producers' incentives for horizontal differentiation via relaxing price competition amongst producers, in a way which prices act as a signal and consist of a quality premium. This is related to the second part of this paper's analysis (Section 4.2. of Chapter 4) involving a franchise market. Consumers demand and preferences for credence goods often perceived from their willingness to pay.

3.2.1. Willingness to Pay

There are other factors why consumers might be willing to pay a premium besides the quality attribute, such that they perceive credence goods as fashionable, trendy, or it could be that the purchase the alternative to credence goods would offend other people (McCluskey, 2000). The later is pertinent to Halal goods, especially in a situation where the consumer lives with Muslims housemates, or in a Muslim-dominated country. Consumers would also prefer for the high-quality products, even not for the sake of quality itself but other factors. For instance, when consumers care about other quality or criterion such as animal welfare, environmental, ethical, and religious reasons, to what Antle (1999, in Carlsson et. al., 2004) referred as extrinsic quality.

If the distinctions in quality were signalled efficiently, consumers would be willing to pay a higher price or premium for products of high quality, hence compensating the higher production costs, as suggested by Kola and Latvala (2003). In their research on the effects of information on the demand for beef products credence characteristics in Finland, 59 percent of the respondents showed their willingness to pay a higher price for additional information. Whereas, 41 percent of respondents had zero willingness to pay, in which 35 percent of them are satisfied with the existing information, and 17 percent considered the information is not enough or they did not trust the information.

As credence quality of a product cannot be observed directly at a reasonable cost or without invasive testing, consumers would rely heavily on claims or information made by the producers via brands, labels or advertisements (Cho and Hooker, 2002). This paper's analysis however, only considers that consumers fully trust producers. The next section provides discussion if the information provided is insufficient or inaccurate, resulting a market failure.

3.3. Market Failure

It can be said that the credence market are prone to the problems of market failure. There are different ways for a credence market to result in inefficiency. It is mainly due to information asymmetry between producers and consumers.

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