COMPETITION AND DISCLOSURE^*

Abstract

There are many laws that require sellers to disclose private information about the quality of their products. But the theoretical justification for these laws is not obvious: economic theory predicts that a seller will voluntarily disclose such quality information, however unfavorable, as long as it is costless to do so. Here we show that competitive pressures between firms can undermine this full disclosure result, and explain why it may be the case that only high‐quality firms choose to disclose. In this setting, mandatory disclosure laws can promote competition and raise consumer surplus at the expense of firm profits, potentially increasing the efficiency of the market.

Targeting Transparency

“…Consumers may lack adequate baseline information about quality characteristics and variation to compare products and practices. The case for public intervention arises when such barriers to voluntary disclosure deprive the public of critical information about products or services ( 5,6). This information asymmetry pushes markets away from socially optimal outcomes ( 7).…”

Quality Disclosure Formats in a Distribution Channel

“…1513-1526, © 2009 and the equilibrium demand is D q = q − / 2q , conditional on the wholesale price and the updated qualityq.…”

“…Should the upstream firm seize complete control over the disclosure decision or cede this control to the downstream Management Science 55(9), pp. 1513-1526, © 2009 partner? Should a manufacturer establish quality disclosure capabilities internally at the upstream level, or at the downstream level through the adoption of channel partners with this capability?…”

“…It is established that any private information will be voluntarily unraveled as long as disclosure and verification are costless. Other studies examine factors that may lead to partial disclosure, e.g., disclosure costs (Viscusi 1978, Jovanovic 1982, information acquisition costs (Matthews and Postlewaite 1985, Farrell 1986, Shavell 1994), limited consumer understanding (Fishman and Hagerty 2003), and competition (Board 2009). Lizzeri (1999) investigates certification informediaries' optimal strategies.…”

Information disclosure and peer effects in the use of antibiotics

“…Annually, about $227 million are estimated to be spent on antibiotics for the treatment of the common cold in the United States 8. However, antibiotics do not treat upper respiratory infections caused by viruses like the common cold.…”