Cheating or delighting customers on quality: Strategic implications for delayed information disclosure

This paper seeks to investigate the strategic implications of a firm’s pricing and advertising policies associated with cheating and delighting customers on quality. To this end, we formulate a general model with three alternative options: non-deviant, i.e., fair; and deviant, i.e., cheating and delighting, quality policies. In the case of deviant policies, cheating is a means to inflate goodwill through false advertising in order to draw a cheating rent as long as the cheating is not disclosed, while delighting is a means to enhance goodwill through extra quality in order to benefit from a delighting rent once the delighting is awarded. The probability of disclosure of information on cheating (delighting) depends on the cumulative number of customers cheated (delighted). The information disclosure results in asymmetric market sanction between cheating and delighting. In addition, if revealed, cheating results in the payment of a one-time penalty and the stopping of the activity. We notably show that a non-deviant quality policy is not the preferred option for either the firm or the customers and that history-dependency is an important factor for a successful deviant quality policy.