You have a chronic headache. You visit a neurologist, who diagnoses chronic stress and recommends some minor medication. You are reassured. But what if the doctor says you have a brain tumor that requires surgery? Chances are you will seek a second opinion from the best expert in the field and pay whatever premium is necessary for the consultation.
       Miklos Sarvary, assistant professor of marketing, has recently explored the market for second opinions, looking at how this market for private information--whether sold by physicians, business consultants, financial advisers, or expert trial witnesses--is structured and offering insights for pricing strategies.
       In contrast to information aimed at a general public market, such as a database industry report, private information usually involves very specific information of use solely to a single buyer, Sarvary notes. An important hallmark of private information markets is that typically there is a business relationship between clients and information sellers. Prices are set through a negotiation process and, as a result, information sellers know their customers' problems well enough going in to place an accurate value on the consulting service they are about to offer.
       Sarvary considers how private information sellers should price their products in competitive situations and whether they should target all consumers in their initial search for information or cater only to consumers with a high need for a second opinion. The medical profession is a familiar example of a private information market with second-opinion services. When a disease is diagnosed, another opinion is routinely sought. Some physicians provide nothing but second opinions. While they see only a small percentage of patients, their services are more highly valued. Second-opinion services are frequently found in engineering, finance, marketing, and law. They are also plentiful among portfolio analysts.
       Sarvary argues that private information markets are typically characterized by so-called "path-dependent consumption." That is, a second opinion usually follows a first opinion that contradicts the consumer's prior assumptions. For example, company executives might receive a market projection analysis done by one consultant but find that its recommendation runs counter to their intuition about their own markets. The company may call in a second consulting firm, explain the problem, and ask it to prepare a report on the same issue. The consultant delivering the second analysis knows the client has an urgent need for the information and can price his services higher than the first-opinion provider.
       Under some conditions, competing firms in this type of market engage in what Sarvary calls "temporal differentiation." In other words, they price their products so that all consumers usually consult the lower-quality firm first. A few of those consumers then consult the higher-quality firm for another opinion, which is more costly and purchased only if the client's original assumptions were contradicted by the first firm. "The high-quality firm benefits from the existence of a lower- quality competitor that essentially screens its market," says Sarvary. He points out that information sellers must determine how they want to position themselves: as first-opinion sellers or second-opinion sellers.
       Sarvary notes that not all consulting services carve a distinct business out of second opinions. One obvious example is in accounting where there is not much of a difference between the prices of first or second audit reviews. Rather, accounting firms tend to compete fiercely for a contract on the first bid to the client by lowballing, or lowering prices close to marginal costs, Sarvary says. Information technology analysis firms such as the Gartner Group or Forrester Research also seem not to specialize in providing second opinions exclusively. While it's not unusual for clients to hire more than one of these consulting firms to provide a report, they do not specialize in providing first or second opinions per se. Their prices also tend to be in the same range.

--Barbara Buell

"Temporal Differentiation and the Market for Second Opinions," Miklos Sarvary, GSB Research Paper #1498,
June 1998