Price and quality of professional services and codes of ethics

This paper is concerned with the relationship between professional codes of ethics, which determine the nature of consumers' search technology, and the resulting price-quality equilibrium. Our model explains why professional codes of ethics were traditionally tolerant toward advertisement on location but prohibited advertisement that relates to price or quality. It is shown that lifting the prohibitions on advertisement and bidding may not increase welfare. The existence of restrictive codes of ethics is often thought to provide auditors with incentives to degrade quality and charge higher prices. Our comparative statics results imply, in contrast, that while retaining the firms' monopolistic status, enforcement of codes that positively correlate with transactions costs of information acquisition necessarily improve quality in the long run and have no effect on quality in the short run. The effect on price is ambiguous in the long run, but in the short run enforcement of such codes tends to lower the price of the service.