Competition and Disclosure

Abstract

There are many laws which require sellers to disclose private information about the quality of their products. But the theoretical justification for these laws is not obvious: economic theory predicts that a seller will voluntarily disclose such quality information, however unfavorable, as long as it is costless to do so. Here we show that competitive pressures between firms may undermine this full disclosure result, and explain why only high quality firms choose to disclose. In this setting, mandatory disclosure laws can promote competition and raise consumer surplus at the expense of firm profits, potentially increasing the efficiency of the market.

Keywords: Competition, quality disclosure, mandatory disclosure laws

JEL Classification: C70, K20, L15