What does a free service charge signal?

Eduardo Diaz, a loyal MR reader, asks:

A question for you…have you ever compared in the context of "trade repairs" (i.e. garage door repair, plumbing, etc.) the pros and cons of companies that offer free estimates or evaluations vs. companies that charge an inspection charge?   

My intuition would make me hypothesize that: Free estimate company would have a stronger incentive to be nice to get the business.  They might "sugar coat", if they are unethical and think they can get away with holding you up later.  In this model, the customer might feel "obligated" to reciprocate for the courtesy of the free estimate by giving this provider the business. Company that charges for the inspection would have an incentive to be a little more straight with you, this tendency increasing as the inspection charge comes close to cover the cost to the company of the inspection.  Incentive to be nice is less in this case.  Perhaps, the repair techs with "less people/sales skills" might gravitate to this business model.  or perhaps this model attracts more techs that live far away or don't have a "critical mass" of business in a particular area. These trade repair industries are very competitive due to low barriers to entry and difficulty to collude, so I think competition probably drives the cost structure for those companies to a pretty similar point.   Thus, I'd expect my total cost with a free inspection company vs. an inspection-charge company should be the same, assuming I'm properly informed by reading up on-line reviews, getting several quotes, etc. in other words, the no charge companies will need to recoup the cost of all the inspections that don't result in profitable repair work.

If you think you are likely to proceed with the repair work (rather than junk the thing, try to fix it yourself, decide you're in fact a garage door hypochondriac, etc.), you might be more likely to pay the upfront fee for the estimate.  Of course the company knows you will behave this way.  If they have any ability to price discriminate, for the service itself they will charge you a higher price ex post.  You in turn will shy away from this equilibrium.  In essence paying the upfront service charge reveals something about your type, namely that you are eager for repairs.  We're then more likely to see free estimates as the dominant strategy.  Some subset of firms will charge for estimates if they can appeal to customers who in essence want to face price discrimination to ensure higher service quality from the wealthier firms with more valuable long-term reputational franchises.

Alternatively, assume that if you have to pay to learn the price, the said price information is valuable.  Price information is valuable when the market in question isn't so competitive and when search costs are high.  Producers are signaling that their markets are not so competitive when they charge for service estimates and many producers will shy away from letting on about that to their customers. 

Sometimes you can flip this kind of argument.  You, as a customer, might assume that a firm which charged for estimates had especially informed customers.  You might hope to masquerade as another such informed customer and thus patronize such a firm, hoping that it will treat you well because it is used to dealing with informed buyers.  It is an open question whether this equilibrium holds up.

You can spin many other scenarios, those are just some ideas that came to mind.


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