Strategic Information Disclosure: The Case of Multi-Attribute Products with Heterogeneous Consumers

PWP-CCPR-2005-044

Abstract

We examine the incentives for firms to voluntarily disclose otherwise private information about quality attributes of differentiated products. In particular, we focus on the case of differentiated products with multiple attributes and consumers that are heterogeneous in their preferences over these attributes. We show that there exist certain configurations of consumer preferences under which a firm producing a high-quality product, even with zero costs of disclosure, may choose not to reveal the quality of its product. This failure of firms to voluntarily disclose the quality of their products will arise when providing consumers with more information results in more elastic demands for these products, which, in turn, triggers more intensive price competition and leads to lower prices and profits for all firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory.