Voluntary Quality Disclosure under Price-Signaling Competition

Abstract

We analyze an oligopolistic competition with differentiated products and qualities. The quality of a product is not known to consumers. Each firm can make an imperfect disclosure of its product quality before engaging in price-signaling competition. There are two regimes for separating equilibrium in our model depending on the parameters. Our analysis reveals that, in one of the separating regimes, price signaling leads to intense price competition between the firms under which not only the high-quality firm but also the low-quality firm chooses to disclose its product quality to soften the price competition.

Information in Cournot: Signaling with incomplete control

“…Note that an increase in profits has also been found in Caldieraro et al (2011) in a price-setting and differentiated-product duopoly in which the fraction of informed buyers is endogenized through the inclusion of a disclosure technology.…”

“…In order to study the effect of signaling on the Cournot equilibrium, we retain a standard signaling framework with linear demand in which the quality is related to the reservation price. See Milgrom and Roberts (1986), Bagwell and Riordan (1991), Daughety and Reinganum (1995, 2005, 2007, 2008a, Janssen and Roy (2010), Caldieraro et al (2011), Dubovik and Jansen (2011), and Mirman and Santugini (2011).…”

“…2 Caldieraro et al (2011) show that, in a low-price separating equilibrium regime, the low-quality firm has an incentive to disclose its quality prior to setting price so as to increase the fraction of informed buyers, which leads to less price competition, and, thus, increases the profits of the low-quality firm. The paper is organized as follows.…”

“…First, the signaling game in a Cournot model is slightly different from that studied in the literature. Signaling occurs when each sender is in full control of the signal, e.g., a monopolist setting the price (Bagwell and Riordan, 1991), or oligopolists selling differentiated products, each setting his own price Reinganum, 2007, 2008b;Caldieraro et al, 2011). In a Cournot setting in which the firms sell the same good, there is only one price.…”

“…Another approach suggested by Caldieraro et al (2011) in a price-setting and differentiated-product duopoly is to endogenize the fraction of informed buyers through the inclusion of a disclosure technology. Specifically, in the first stage, the firms decide whether to incur an exogenous cost in order to disclose quality through a trusted certification party.…”