Quality disclosure strategy in a competitive environment with consumers' homogeneity and heterogeneity

Abstract

This study examines the optimal pricing and disclosure strategies of sellers who possess private quality information. We consider two market structures, namely, monopoly market and duopoly market; under each market structure, we further consider two characteristics of consumer preferences for the same product: homogeneity and heterogeneity. How competition and whether consumers are heterogeneous affects sellers' disclosure strategies, and profitability is the focus of our attention. Interestingly, we show that the monopolistic seller's profit is likely to increase as the disclosure cost, which is not possible in a competitive environment. We indicate that when consumers are homogeneous, sellers can obtain higher returns and are more likely to engage in quality disclosure. Finally, we show that when the market is filled with homogeneous consumers, competition always increases the motivation for sellers to engage in quality disclosure. However, when the market is filled with heterogeneous consumers, competition actually hinders sellers from engaging in quality disclosure when the cost of disclosure is low. Our results help company managers in making better disclosure and pricing strategies.