The Bright Side of Cost Transparency: Facilitating Product Innovation

26 Pages Posted: 16 Feb 2016 Last revised: 6 Feb 2020

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Tianxin Zou

University of Florida - Warrington College of Business Administration

Date Written: April 19, 2019

Abstract

A firm’s cost for its products is increasingly transparent to consumers as the firm itself or third parties publish such information. Using a dynamic model of firm pricing with forward-looking consumer choice, this paper assesses the effect of cost transparency on firm pricing, consumer surplus, firm profits and new product innovation. Cost transparency stymies the low-cost firm’s ability to intertemporally price-discriminate because consumers now correctly anticipate the future price drops and delay purchases, as it is no longer feasible to pool price with the high-cost firms, whose future prices drop less because of the high cost. Thus, cost transparency will benefit the high-cost firms but hurt the low-cost firms. Surprisingly, consumers can also be hurt by cost transparency if the firm has a high cost. However, cost transparency leads to an expected increase in both firm profits and consumer surplus—a win-win for both firms and consumers. This increase in expected firm profits facilitates greater investment by firms in new-product innovation.

Keywords: signaling, dynamic pricing, price discrimination, strategic consumer, cost transparency, consumer search, consumer surplus, market structure

Suggested Citation

Jiang, Baojun and Sudhir, K. and Zou, Tianxin, The Bright Side of Cost Transparency: Facilitating Product Innovation (April 19, 2019). Available at SSRN: https://ssrn.com/abstract=2732812 or http://dx.doi.org/10.2139/ssrn.2732812

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

K. Sudhir

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Tianxin Zou

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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