Quality disclosure in a competitive environment with consumer's elation and disappointment

Abstract

When the quality of a firm's product is unobservable, consumers may generate some psychological feelings of elation or disappointment when the perceived product quality exceeds or falls short of their initial expectations. This paper investigates firms’ optimal information disclosure strategies in a competitive environment when consumers have such psychological feelings. We consider three market situations: a monopoly setting, a duopoly setting where firms do not share their quality information with each other, and a duopoly setting where firms share their quality information with each other, so as to understand how market competition and horizontal information sharing influence the equilibrium outcomes. We show that both psychological disappointment and elation can induce the firm(s) to disclose more quality information than that when the consumer is fully rational. In a monopoly setting, the increase of the magnitude of disappointment always undermines the firm's profit while the increase of the magnitude of elation may hurt the firm's profitability. In contrast, in a duopoly setting, the increase of the magnitude of disappointment and/or elation always improves the firm's profitability. Moreover, such improvement can be further enhanced when the competing firms share their quality information upfront before making their disclosure decisions.