Essays on Information, Disclosure, and Search

Abstract

This dissertation explores the incentives of manufacturers to communicate product attribute information to consumers strategically. Two essays examine how firms shape consumer knowledge and search behavior to create favorable competitive conditions, either in horizontal competition with rivals or in vertical relationships with suppliers.Essay 1 outlines how vertical interactions between the manufacturer and suppliers and the horizontal competition between suppliers determine a manufacturer’s incentives for information disclosure. Contrary to the classic literature on quality disclosure, which suggests that manufacturers of all quality levels should voluntarily disclose their private quality information to buyers, recent theoretical advances indicate that mechanisms such as vertical channel interactions may lead manufacturers to withhold high-quality levels. In contrast, empirical evidence and anecdotal observations show that many nonintegrated firms do disclose high-quality levels. This essay addresses this discrepancy by providing a theoretical explanation of how the nature and intensity of supplier-level competition influence manufacturers' incentives to disclose quality. I show that when suppliers are vertically differentiated, the manufacturer discloses all quality levels, regardless of the intensity of upstream competition. Moreover, when suppliers are homogeneous with asymmetric costs or horizontally differentiated, full disclosure can arise if competition is sufficiently intense. Otherwise, partial disclosure emerges, where the manufacturer discloses high and medium-low quality levels but avoids disclosing low and medium-high levels. Additionally, this essay identifies conditions under which channel instruments, such as side payments and pre-commitment to wholesale prices, can encourage manufacturers to disclose quality, thereby improving system profits. The results highlight the impact of disclosure on consumer welfare and product line decisions. Finally, in contrast with the channels’ literature, this essay demonstrates that when consumers are uncertain of quality, introducing upstream competition to a bilateral monopoly may hurt channel efficiency. Essay 2 provides a rationale for the use of product comparison tools and identifies the conditions under which this strategy is profitable. Some firms offer unbiased comparison tools on their websites, even when doing so reveals weaknesses in certain product attributes and risks losing customers already familiar with the firm. Using a game-theoretic framework, we conceptualize comparison tools as a strategic means of influencing the consumer search process by disclosing competing products’ attributes. The model considers manufacturer comparative disclosure and consumer search as two parallel information channels. Contrary to the expectations of regulators and policymakers, this essay shows that comparison tools can decrease competition and lead to higher market prices. It argues that by increasing consumer knowledge about competing products, comparison tools enable marketers to segment the market more effectively based on consumer fit, resulting in less elastic demand. Surprisingly, when firms are symmetric in quality, mutual comparison not only benefits them but also may increase consumer welfare. With firms asymmetric in quality, mutual comparison benefits those with closer quality levels; however, when the quality gap is wide, only the lower-quality firm benefits from comparison. The findings suggest that comparison by a higher-quality product is more likely to be profitable if it is more familiar to consumers or if consumer search costs are higher.