Unraveling the cheap talk’s informativeness of product quality in supply chains: A lying aversion perspective

Abstract

In many industries, product quality can be uncertain due to design complexity and component variety. Manufacturers, who possess private information about product quality, may exaggerate quality level or conceal defects to dealers via informal communication, even though the product’s true quality is inferior. When this happens, it may mislead dealers to order more inventory and result in overstock. This paper investigates whether and when the manufacturer’s deceptive behavior can be mitigated by factors such as lying aversion. We find that private quality information can be credibly communicated to the dealer via cheap talk if the manufacturer is sufficiently averse to lying. Interestingly, credible information sharing may not always lead to performance improvement, depending on the quality level and the accuracy of the signal. Specifically, when the product’s quality is relatively consistent, credible information sharing increases the profits of both the manufacturer and the dealer, resulting in a win–win situation. On the other hand, less accurate quality signal can benefit the manufacturer most of the time, but will hurt the dealer and the supply chain as a whole. Our research unravels the core mechanism of cheap talk’s informativeness, highlights the pros and cons of credible communication, and proposes possible solutions that lead to mutually beneficial outcomes for the supply chain.