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A Model of Product Design and Information Disclosure Investments

  • Panos Markopoulos

    ()

    (Department of Business and Public Administration, University of Cyprus)

  • Kartik Hosanagar

    ()

    (Department of Operations and Information Management, Wharton School, University of Pennsylvania)

Registered author(s):

    As online information availability for products and services is increasing and as buyers engage in more online search prior to purchase decisions, it is becoming more important for firms to know when to invest to reduce buyer uncertainty. This article argues that today's firms should view product design and investments to reduce buyer uncertainty as an integrated process, which is in turn heavily influenced by how much information buyers can obtain independently, for example, by reading other buyers' reviews or by accessing third party infomediaries. Using a game-theoretic model of a competitive market, we explain how product quality decisions influence future investments to reduce buyer uncertainty, and demonstrate how firms should take this dependency into account to avoid over-investing in quality. We also show that firms, and especially lower quality firms, can free ride on the product information already available in the market, and reduce their own disclosure investments. Finally we show that firms can take further advantage of such ambient information availability to ease the intensity of competition among them, and specifically to reduce their product quality investments.

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    File URL: http://www.netinst.org/Markopoulos_Hosanagar_13-25.pdf
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    Paper provided by NET Institute in its series Working Papers with number 13-25.

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    Length: 30 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:net:wpaper:1325
    Contact details of provider: Web page: http://www.NETinst.org/

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    1. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
    3. Insuk Cheong & Jeong-Yoo Kim, 2004. "Costly Information Disclosure in Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 121-132, 03.
    4. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-83, February.
    6. Steven Shavell, 1994. "Acquisition and Disclosure of Information Prior to Sale," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 20-36, Spring.
    7. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    8. Sanford Grossman & Oliver Hart, . "Disclosure Laws and Takeover Bids," Rodney L. White Center for Financial Research Working Papers 23-79, Wharton School Rodney L. White Center for Financial Research.
    9. Paul Milgrom & John Roberts, 1986. "Relying on the Information of Interested Parties," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 18-32, Spring.
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    11. Oliver Board, 2009. "COMPETITION AND DISCLOSURE -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 197-213, 03.
    12. Steven Matthews & Andrew Postlewaite, 1985. "Quality Testing and Disclosure," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 328-340, Autumn.
    13. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
    14. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
    15. Okuno-Fujiwara, Masahiro & Postlewaite, Andrew & Suzumura, Kotaro, 1990. "Strategic Information Revelation," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 25-47, January.
    16. Dye, Ronald A, 1986. "Proprietary and Nonproprietary Disclosures," The Journal of Business, University of Chicago Press, vol. 59(2), pages 331-66, April.
    17. Yubo Chen & Jinhong Xie, 2005. "Third-Party Product Review and Firm Marketing Strategy," Marketing Science, INFORMS, vol. 24(2), pages 218-240, February.
    18. Monic Sun, 2011. "Disclosing Multiple Product Attributes," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 195-224, 03.
    19. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
    20. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
    21. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
    22. Ginger Zhe Jin, 2005. "Competition and Disclosure Incentives: An Empirical Study of HMOs," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 93-112, Spring.
    23. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect Of Information On Product Quality: Evidence From Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 409-451, May.
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