Deception, exploitation and lifespan of buyer-seller relationship in experience goods markets

A market where short-lived customers, i.e., one-time shoppers, interact with a long-lived expert is considered. The expert privately observes whether or not a particular treatment is necessary for his customers and has incentive to recommend the treatment even if it is unnecessary. When the expert is known to be opportunist, i.e., rational in the usual sense, his best equilibrium payoff can be achieved by being honest at all times. However, if the customers believe that the expert is a commitment type who recommends the treatment only when it is necessary, then the expert can build reputation as an honest seller and exploit his customers to achieve higher payoffs. Exploiting customers for a long period of time is extremely unlikely even if the seller's past actions are imperfectly observed. However, this behavior is a part of many equilibria when the expert's customer is also a long-lived agent.