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Information Provision in a Vertically Differentiated Competitive Marketplace

Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130
School of Business, University of Alberta, Edmonton, Alberta T6G 2R6, Canada
kuksov{at}wustl.edu
yuanfang.lin{at}ualberta.ca

This paper examines the interaction of information provision, product quality, and pricing decisions by competitive firms to explore the following question: in a competitive market where consumers face uncertainty about product quality and/or their preference for quality, which firms—those that sell higher- or lower-quality products—have the higher incentive to provide what type of information? We find that while the higher-quality firm should always provide information resolving consumer uncertainty on product quality, the lower-quality firm under certain conditions will have the higher incentive to and will be the one to provide information resolving consumer uncertainty about their quality preferences. In the analysis, we trace the latter result to competition and to free-riding on the information provision. Specifically, in a monopoly market or when consumer free-riding is restricted by the costliness of store visits, the lower-quality firm would have a lower incentive to provide information resolving consumer preference uncertainty than otherwise. The model is also adapted to examine product returns as a possible strategy of information provision.

Key Words: uncertainty; information; competitive strategy; service; free-riding; game theory; product returns
History: Received: December 7, 2006; accepted: December 19, 2008.