Editorial BoardXML

Seoul Journal of Economics - Vol. 34 , No. 3
[Paper List] [Go to Volume List]

[ Article ]
Seoul Journal of Economics - Vol. 34, No. 3, pp. 365-392
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2021
Received 18 Feb 2021 Revised 18 Jun 2021 Accepted 24 Jun 2021
DOI: https://doi.org/10.22904/sje.2021.34.3.002

Cheap-Talk Disclosure of Negative Information and Risk-Averse Buyers
Dmitry Shapiro ; Seung Huh
Dmitry Shapiro, Department of Economics and Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, South Korea, Tel: 82-2-880-2287 (dmitry.shapiro@snu.ac.kr)
Seung Huh, Corresponding Author. College of Business Administration, Incheon National University, 119 Academy-ro, Yeonsu-Gu, Incheon 22012, South Korea, Tel: 82-32-835-8719 (shuh@inu.ac.kr)

Funding Information ▼

JEL Classification: D21, D81, L15, M31

Abstract

In this paper, we study the incentives of low-quality sellers to separate them from high-quality sellers. We consider a framework with asymmetric quality information where the only way to communicate quality is via cheap-talk messages. In this framework, any separating strategy pursued by high-quality sellers can be imitated costlessly by low-quality sellers. We show that in the duopoly setting with risk-averse buyers, equilibria exist, where low-quality sellers voluntarily disclose negative information about their products. If the seller is a monopolist or buyers are risk-neutral, such equilibria do not exist.

Keywords: Negative information, Risk aversion, Cheap talk, Product differentiation
Acknowledgments

This work was supported by the New Faculty Startup Fund of Seoul National University, Creative-Pioneering Researchers Program of Seoul National University and the fund from Incheon National University’s Research Grant (2020).

References
1. Atiyeh, Clifford. Everything you need to know about the VW diesel-emissions scandal. Car and Driver, 2016. (https://web.archive.org/web/20200705083431/https://www.caranddriver.com/news/a15339250/everything-you-need-to-know-about-the-vw-diesel-emissions-scandal/)
2. Bauer, Raymond A. Consumer behavior as risk taking. In Hancock RS (ed) Dynamic Marketing for a Changing World. Chicago: American Marketing Association, 1960: 389-398
3. Berger, Jonah, Sorensen, Alan T., and Rasmussen, Scott J. “Positive effects of negative publicity: When negative reviews increase sales.” Marketing science 29 (No. 5 2010): 815-827.
4. Board, Oliver. “Competition and disclosure.” The Journal of Industrial Economics 57 (No. 2009): 197-213.
5. Busch, Paul, and Wilson, David T. “An experimental analysis of a salesman’s expert and referent bases of social power in the buyer-seller dyad.” Journal of marketing research 13 (No. 1 1976): 3-11.
6. Cheong, Insuk, and Kim, Jeong-Yoo. “Costly information disclosure in oligopoly.” The Journal of Industrial Economics 52 (No. 1 2004): 121-132.
7. Chu, Junhong, and Chintagunta, Pradeep K. “Quantifying the economic value of warranties in the US server market.” Marketing Science 28 (No. 1 2009): 99-121.
8. Crosby, Lawrence A., Evans, Kenneth R., and Cowles, Deborah. “Relationship quality in services selling: an interpersonal influence perspective.” Journal of marketing 54 (No. 3 1990): 68-81.
9. Crowley, Ayn E., and Hoyer, Wayne D. “An integrative framework for understanding two-sided persuasion.” Journal of Consumer research 20 (No. 4 1994): 561-574.
10. Dowling, Grahame R. “Perceived risk: the concept and its measurement.” Psychology & Marketing 3 (No. 3 1986): 193-210.
11. Dranove, David, and Jin, Ginger Z. “Quality disclosure and certification: Theory and practice.” Journal of Economic Literature 48 (No. 4 2010): 935-63.
12. Eisend, Martin. “Two-sided advertising: A meta-analysis.” International Journal of Research in Marketing 23 (No. 2 2006): 187-198.
13. Eisend, Martin. “Understanding two-sided persuasion: An empirical assessment of theoretical approaches.” Psychology & Marketing 24 (No. 7 2007): 615-640.
14. Erdem, Tülin, Zhao, Ying, and, Valenzuela, Ana. “Performance of store brands: A cross-country analysis of consumer store-brand preferences, perceptions, and risk.” Journal of Marketing Research 41 (No. 1 2004): 86-100.
15. Farrell, Joseph von Rosthorn. Prices as signals of quality. University of Oxford, 1981.
16. Fay, Scott, and Xie, Jinhong. “The economics of buyer uncertainty: Advance selling vs. probabilistic selling.” Marketing Science 29 (No. 6 2010): 1040-1057.
17. Gardete, Pedro M. “Cheap-talk advertising and misrepresentation in vertically differentiated markets.” Marketing Science 32 (No. 4 2013): 609-621.
18. Geyskens, Inge, Steenkamp, Jan-Benedict EM, and Kumar, Nirmalya. “Generalizations about trust in marketing channel relationships using meta-analysis.” International Journal of Research in marketing 15 (No. 3 1998): 223-248.
19. Grossman, Sanford J. “The informational role of warranties and private disclosure about product quality.” The Journal of Law and Economics 24 (No. 3 1981): 461-483.
20. Grossman, Sanford J., and Hart, Oliver D. “Disclosure laws and takeover bids.” The Journal of Finance 35 (No. 2 1980): 323-334.
21. Guo, Liang, and Zhao, Ying. “Voluntary quality disclosure and market interaction.” Marketing Science 28 (No. 3 2009): 488-501.
22. Heal, Geoffrey. “Do bad products drive out good?” The Quarterly Journal of Economics 90 (No. 3 1976): 499-502.
23. Hotz, V. Joseph, and Xiao, Mo. “Strategic information disclosure: The case of multiattribute products with heterogeneous consumers.” Economic Inquiry 51 (No. 1 2013): 865-881.
24. Kalra, Ajay, and Shi, Mengze. “Designing optimal sales contests: A theoretical perspective.” Marketing Science 20 (No. 2 2001): 170-193.
25. Janssen, Maarten CW, and Teteryatnikova, Mariya. “Horizontal product differentiation: Disclosure and competition.” The Journal of Industrial Economics 64 (No. 4 2016): 589-620.
26. Kim, Kyungmin. “Endogenous market segmentation for lemons.” The RAND Journal of Economics 43 (No. 3 2012): 562-576.
27. Kourouxous, Thomas, and Bauer, Thomas. “Violations of dominance in decision-making.” Business Research 12 (No. 1 2019): 209-239.
28. Lichtenstein, Donald R., and Burton, Scot. “The relationship between perceived and objective price-quality.” Journal of marketing research 26 (No. 4 1989): 429-443.
29. Markin, Rom J. Consumer Behavior: A Cognitive Orientation. New York: Macmillan, 1974.
30. Masatlioglu, Yusufcan, and Raymond, Collin. “A behavioral analysis of stochastic reference dependence.” American Economic Review 106 (No. 9 2016): 2760-82.
31. Milgrom, Paul R. “Good news and bad news: Representation theorems and applications.” The Bell Journal of Economics 12 (No. 2 1981): 380-391.
32. Rao, Akshay R., and Monroe, Kent B. “The effect of price, brand name, and store name on buyers’ perceptions of product quality: An integrative review.” Journal of marketing Research 26 (No. 3 1989): 351-357.
33. Riordan, Michael H. “Monopolistic competition with experience goods.” The Quarterly Journal of Economics 101 (No. 2 1986): 265-279.
34. Ross, Ivan. “Perceived risk and consumer behavior: a critical review.” Advances in Consumer Research 2 (No. 1 1975):1-20.
35. Rubel, Olivier, and Prasad, Ashutosh. “Dynamic incentives in sales force compensation.” Marketing Science 35 (No. 4 2016): 676-689.
36. Ryu, Suyeol, and Kim, Iltae. “Conjectures in cournot duopoly under cost uncertainty.” Seoul Journal of Economics 24 (No. 1 2011): 73-86.
37. Settle, Robert B., and Golden, Linda L. “Attribution theory and advertiser credibility.” Journal of Marketing Research 11 (No. 2 1974): 181-185.
38. Shaked, Avner, and Sutton, John. “Relaxing price competition through product differentiation.” The review of economic studies 49 (No. 1 1982): 3-13.
39. Shapiro, Carl. “Premiums for high quality products as returns to reputations.” The quarterly journal of economics 98 (No. 4 1983): 659-679.
40. Shapiro, Dmitry. “Profitability of the name-your-own-price channel in the case of risk-averse buyers.” Marketing Science 30 (No. 2 2011): 290-304.
41. Shapiro, Dmitry, and Huh, Seung. “Incentives of low-quality sellers to disclose negative information.” Journal of Economics & Management Strategy 30 (No. 1 2021): 81-99.
42. Smallwood, Dennis E., and Conlisk, John. “Product quality in markets where consumers are imperfectly informed.” The Quarterly Journal of Economics 93 (No. 1 1979): 1-23.
43. Spulber, Daniel F. “Bertrand competition when rivals’ costs are unknown.” The Journal of Industrial Economics 43 (No. 1 1995): 1-11.
44. Stone, Robert N., and Winter, Frederick. Risk in buyer behavior contexts: A clarification. College of Commerce and Business Administration. University of Illinois at Urbana-Champaign, 1985.
45. Taylor, James W. “The role of risk in consumer behavior: A comprehensive and operational theory of risk taking in consumer behavior.” Journal of marketing 38 (No. 2 1974): 54-60.
46. Viscusi, W. Kip. “A note on” lemons” markets with quality certification.” The Bell Journal of Economics 9 (No. 1 1978): 277-279.
47. Völckner, Franziska, and Hofmann, Julian. “The price-perceived quality relationship: A meta-analytic review and assessment of its determinants.” Marketing letters 18 (No. 3 2007): 181-196.
48. Wilson, Robert. “Reputations in games and markets.” Game-theoretic models of bargaining 96 (1985): 27-62.
 

Editorial Office, Seoul Journal of Economics, Institute of Economic Research, Seoul National University 599 Gwanangno, Gwanak-gu, Seoul 151-746, Korea
Tel: +82-2-880-5434 | Fax: +82-2-888-4454 | E-mail: sje@plaza.snu.ac.kr
Copyright (c) 2020 SJE. All rights reserved.