Quality disclosure in the presence of strategic consumers

Abstract

Consider a market for short-life products, such as smartphones, where a firm and consumers have asymmetric quality information, the firm sells products in two periods, and consumers make purchase decisions strategically. We investigate when a firm should disclose quality and the interaction between consumers' strategic behavior and the firm's disclosure behavior. We obtain several findings. First, regardless of whether consumers have low or high patience, the firm should disclose quality information if product quality is high and conceal it if product quality is low. However, for products with moderate quality levels, the firm will disclose more quality information to consumers with relatively high or low patience levels than when consumer patience is moderate. Second, firms will disclose less information when consumers behave strategically than when they are myopic. Third, when concealing quality information is an equilibrium, product prices are affected only by disclosure costs and independent of true product quality. Finally, the firm can benefit from consumers' strategic behavior and a higher disclosure cost, but greater patience might be detrimental to consumer surplus and social welfare.