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A Model of Product Design and Information Disclosure Investments

Author

Listed:
  • Panos Markopoulos

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

  • Kartik Hosanagar

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

Abstract

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.

Suggested Citation

  • Panos Markopoulos & Kartik Hosanagar, 2013. "A Model of Product Design and Information Disclosure Investments," Working Papers 13-25, NET Institute.
  • Handle: RePEc:net:wpaper:1325
    as

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    File URL: http://www.netinst.org/Markopoulos_Hosanagar_13-25.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Buyer uncertainty; information disclosure; product quality; infomediaries;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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