Misrepresentation of Credence Goods and Channel Design

51 Pages Posted: 21 Jan 2015

See all articles by Dinah Cohen-Vernik

Dinah Cohen-Vernik

Rice University - Jones Graduate School of Business

Pinar Yildirim

University of Pennsylvania - The Wharton School

Vikas Mittal

Rice University

Date Written: January 10, 2015

Abstract

Credence goods are often delivered to consumers via a vertical channel where the true quality of the good is determined by a manufacturer (an upstream channel member), while consumers' quality perceptions are driven by the observable signals of quality sent by a retailer (a downstream channel member). We study product misrepresentation in a vertical channel with asymmetric information about true product quality and focus on conditions that incentivize downstream channel members to misrepresent product quality to consumers. We develop a model with credulous consumers who rely on seller signals of quality to determine their expected utility from consumption of goods. The model shows that product misrepresentation rises as an equilibrium outcome due to actions of both the manufacturer and the retailer. We suggest that channel design can be a mechanism mitigating the level of misrepresentation. Specifically, adding more retailers in a channel can reduce the extent of misconduct and can increase the profits of the channel members.

Keywords: B2B Marketing, Misrepresentation, Quality, Product Delivery, Channel Design

Suggested Citation

Cohen-Vernik, Dinah and Yildirim, Pinar and Mittal, Vikas, Misrepresentation of Credence Goods and Channel Design (January 10, 2015). Available at SSRN: https://ssrn.com/abstract=2552807 or http://dx.doi.org/10.2139/ssrn.2552807

Dinah Cohen-Vernik (Contact Author)

Rice University - Jones Graduate School of Business ( email )

Houston, TX 77005
United States

Pinar Yildirim

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Vikas Mittal

Rice University ( email )

6100 South Main Street
250 McNair
Houston, TX 77005-1892
United States

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