Designing Vertical Differentiation with Information

We study information design in a vertically differentiated market. A third party publicly discloses information about the product qualities of two competing firms. More precise information improves consumer matching but increases perceived differentiation, enabling firms to raise prices. Disclosing the product ranking alone suffices to maximize industry profits in a fully covered market. Consumer surplus, however, is maximized by a rank-preserving policy that withholds any information that overturns the prior ranking, as gains from price competition outweigh losses from allocative inefficiency. The conflict between profit- and consumer-optimal policies persists in settings with endogenous participation and nonlinear or asymmetric costs.