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Incentives of low‐quality sellers to disclose negative information

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  • Dmitry Shapiro
  • Seung Huh

Abstract

The paper studies incentives of low‐quality sellers to disclose negative information about their products. We develop a model in which one's quality can be communicated via cheap‐talk messages only. This setting limits the ability of high‐quality sellers to separate, as any communication strategy they pursue can be costlessly imitated by low‐quality sellers. We study two factors that can incentivize low‐quality sellers to communicate their quality: buyers' loss aversion and competition. Quality disclosure reduces buyers' risk, thereby increasing their willingness to pay for the product. It also introduces product differentiation, softening the competition.

Suggested Citation

  • Dmitry Shapiro & Seung Huh, 2021. "Incentives of low‐quality sellers to disclose negative information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(1), pages 81-99, February.
    • Handle: RePEc:bla:jemstr:v:30:y:2021:i:1:p:81-99
    DOI: 10.1111/jems.12401
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    References listed on IDEAS

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    Cited by:

    1. Dmitry A. Shapiro & Jaesun Lee, 2022. "Revealing Negative Information in Monopoly and Duopoly Settings: Experimental Analysis," Korean Economic Review, Korean Economic Association, vol. 38, pages 167-205.

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