Firms ’ Incentives to Disclose Information about Product Quality : The Case of Multi - Attribute Products with Heterogeneous Consumers

In this paper, we examine the incentives for firms to voluntarily disclose otherwise private information about quality attributes of differentiated products when those products have multiple attributes and consumers are heterogeneous in their tastes over these attributes. In particular, we focus on whether the so-called “unraveling result”—in equilibrium, firms fully disclose the quality of their products voluntarily when disclosure costs are zero—holds when disclosure of quality information adds vertical differentiation into a product world with existing horizontal differentiation. We show that there exist certain configurations of consumer multidimensional preferences under which firms, even with high-quality products, may not have incentive to disclose. This failure to disclose voluntarily will arise when disclosure results in more elastic demand for products and hence triggers more intense price competition among firms, leading to lower prices for all products. The escalation of competition can make all firms worse off and lead firms to not disclose the quality of their products, even with zero disclosure costs. As a result, the equilibrium in which quality disclosure is voluntary may diverge from that in which quality disclosure is mandatory. JEL classifications: L15 (Information and Product Quality); L5 (Regulation and Industrial Policy)