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Voluntary Quality Disclosure and Market Interaction

Department of Marketing, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China
Department of Marketing, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China
mkguo{at}ust.hk
mkyzhao{at}ust.hk

Marketers disclose quality information directly to potential consumers using a variety of communication channels. This study investigates how competition may influence duopoly firms' incentive to voluntarily reveal quality information. We show that firms in competitive markets reveal less information than a monopoly firm. In addition, sequential disclosure leads to asymmetric equilibrium disclosure behavior: the disclosure leader reveals unambiguously less information than in the simultaneous disclosure case, whereas the follower ex ante reveals less (more) private information than that released by the leader or by the firms in the simultaneous case when the disclosure cost is sufficiently low (high). We also examine the equilibrium firm profits and social welfare. We demonstrate that there may be a U-shaped relationship between equilibrium monopoly profits (or social welfare under both monopoly and duopoly) and the disclosure cost. Moreover, in comparison to the simultaneous disclosure case, sequential disclosure can lead to increasingly softened competition, improving both firm profitability and social welfare.

Key Words: communication; competition; disclosure; information transmission; quality
History: Received: April 23, 2006; accepted: March 27, 2008.

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