Incentives of Low-Quality Sellers to Disclose Negative Information

38 Pages Posted: 9 Jun 2019

See all articles by Dmitry Shapiro

Dmitry Shapiro

Department of Economics, Seoul National University

David Seung Huh

Incheon National University - College of Business Administration

Date Written: March 13, 2019

Abstract

The paper studies incentives of low-quality sellers to disclose negative information about their product. We develop a model where one’s quality can be communicated via cheap-talk messages only. This setting limits ability of high-quality sellers to separate as any communication strategy they pursue can be costlessly imitated by low-quality sellers. Two factors that can incentivize low-quality sellers to communicate their quality are buyers’ risk-attitude and competition. Quality disclosure reduces buyers’ risk thereby increasing their willingness to pay. It also introduces product differentiation softening the competition. We show that equilibria where low-quality sellers separate exist under monopoly and duopoly. Even though low-quality sellers can costlessly imitate high-quality sellers, equilibria where high-quality sellers separate can also exist but under duopoly only.

Keywords: Negative information, product differentiation, cheap talk, lemon markets

JEL Classification: D21, L15

Suggested Citation

Shapiro, Dmitry and Huh, David Seung, Incentives of Low-Quality Sellers to Disclose Negative Information (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3392166 or http://dx.doi.org/10.2139/ssrn.3392166

Dmitry Shapiro (Contact Author)

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

David Seung Huh

Incheon National University - College of Business Administration ( email )

119 Academy-ro
Yeonsu-gu
Incheon
Korea, Republic of (South Korea)

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