Breaking into the regulation market

In response to the new Tyler Cowen and Alex Alex Tabarrok piece on information asymmetry, Arnold Kling wonders if:

It becomes harder for new entrants to break into a market governed by reputation than one governed by regulation. Obtaining a license from a regulatory agency might be easier than obtaining visibility in a rating system.

My response:

Wouldn’t it be easier to break into the reputation based system? Assuming all sellers must attract buyers, a seller must build reputation regardless, which is usually done through word of mouth. However, immediately a buyer faces an information asymmetry problem. Review systems announce the reputation of a buyer reducing this information problem and the cost to obtain reputation. Still, in a license system, the seller must incur an additional fixed cost. In total, license system faces the cost of regulation and the cost of information.

First published Apr 9, 2015