Hide Supremacy or Admit Inferiority—Market Entry Strategies in Response to Consumer Informational Needs

Abstract

This paper investigates information provision and pricing decisions by vertically differentiated firms sequentially entering a market where consumers face uncertainty about the quality of the new product offering as well as their own preferences or willingness to pay for quality. We find that regardless of the quality of the late entrant firm’s product, the first entrant would like to commit to and provide quality-revealing information. Surprisingly, we find that a late entrant with a superior product may choose not to inform consumers of its better quality, even if that would result in consumers perceiving its product to be of inferior quality. Instead, the high-quality late entrant will opt to educate consumers about their preference for quality. On the other hand, a late entrant offering a low-end product may wish to admit to offering an inferior product rather than allowing consumers to incorrectly assume that its product may be of higher quality. We identify the primary driving factors for these seemingly unexpected informational services decisions to be the cost of educating and helping consumers to resolve different types of uncertainties, the degree of vertical product differentiation, and the early entrant service preemption.