Voluntary Disclosure of Product Information: The Case of E-Book Samples

Abstract

An important question in markets with asymmetric information is why in practice fewer sellers voluntarily disclose their private information than theory would predict. To better understand this discrepancy, I use data from an online self-publishing platform to examine the empirical relationship between pricing and voluntary disclosure. On this platform, I observe whether authors disclose characteristics of their e-books by offering free samples. In contrast to the prediction of theories of unraveling, I show that for e-books without a posted online rating, indicating that their quality is unknown to the market, offering a sample is associated with a lower price. I also show that for unrated e-books, fewer authors offer a sample while simultaneously setting a higher price than authors of rated e-books. These results can be explained by incorporating into a model a fraction of naive buyers who do not update their beliefs upon observing that a seller does not disclose. This gives low-quality sellers an incentive to conceal their quality by not disclosing and to set high prices to exploit naive buyers.

Keywords: Product Information, Disclosure, Quality, Sampling, Informative Advertising

JEL Classification: L15, L86, M37