Misrepresentation of Credence Goods and Channel Design
Penn collection
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misrepresentation
quality
product delivery
channel design
Advertising and Promotion Management
Business
Business Administration, Management, and Operations
Business Analytics
Business and Corporate Communications
Management Sciences and Quantitative Methods
Marketing
Operations and Supply Chain Management
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Abstract
Credence goods are often delivered to consumers via a vertical channel where the true quality of the good is determined by a manufacturer (an upstream channel member), while consumers' quality perceptions are driven by the observable signals of quality sent by a retailer (a downstream channel member). We study product misrepresentation in a vertical channel with asymmetric information about true product quality and focus on conditions that incentivize downstream channel members to misrepresent product quality to consumers. We develop a model with credulous consumers who rely on seller signals of quality to determine their expected utility from consumption of goods. The model shows that product misrepresentation rises as an equilibrium outcome due to actions of both the manufacturer and the retailer. We suggest that channel design can be a mechanism mitigating the level of misrepresentation. Specifically, adding more retailers in a channel can reduce the extent of misconduct and can increase the profits of the channel members.