Designing Vertical Differentiation with Information

We study information design in a vertically differentiated market. Two firms offer products of ex-ante unknown qualities. A third party designs a system to publicly disclose information. More precise information guides consumers toward their preferred product but increases expected product differentiation, allowing firms to raise prices. Full disclosure of the product ranking alone suffices to maximize industry profits. Consumer surplus is maximized, however, whenever no information about the product ranking is disclosed, as the benefit of competitive pricing always dominates the loss from suboptimal choices. The provision of public information on product quality becomes questionable.