Date of this Version
New technologies such as product simulators and virtual reality now allow firms to provide realistic product usage experiences and reduce buyer uncertainty about product quality. We argue that today’s firms should view product design and investments to reduce buyer uncertainty as an integrated process, which is in turn influenced by how much information buyers can obtain from third-party infomediaries. We introduce a game-theoretic model of a competitive market where both quality production and quality disclosure are endogenous decisions, affected by information made available by third parties. We show that quality investment under uncertainty never exceeds the level of quality investment under perfect information. Furthermore, we show that information availability by third parties allows firms to free ride, and it especially favors lower quality firms, who can reduce their information disclosure investments more so than higher-quality firms. Finally, we show that the intuitive argument that firms must improve their product quality when overall information availability in the market improves does not always hold. Instead, improved information availability may enable firms to reduce their quality in some situations.
Originally published in Management Science © 2018 INFORMS
This is a pre-publication version. The final version is available at http://dx.doi.org/10.1287/mnsc.2016.2634
buyer uncertainty, information disclosure, product quality, infomediaries
Markopoulos, P. M., & Hosanagar, K. (2018). A Model of Product Design and Information Disclosure Investments. Management Science, 64 (2), 739-759. http://dx.doi.org/10.1287/mnsc.2016.2634
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Date Posted: 15 June 2018
This document has been peer reviewed.