Lecture Unit 9: Information Disclosure and Strategy (1/2)

Question 1

What are the 2 ways, firms can enhance the benefits of their productsß

Answer 1

• Vertical differentiation
• Horizontal differentiation

Question 2

What is meant with disclosure?

Answer 2

• informing consumers about a products benefits

Question 3

What does vertical differentiation do?

Answer 3

enhances the benefit of a product to all consumers –> virtually ALL consumers would prefer the product over another (BUT the price is also a factor)

Question 4

Vertical differentiation: How is quality signaled?

Answer 4

• Disclosure
• Warrantees
• Branding
• Non-profit status

Question 5

What does horizontal differentiation mean?

Answer 5

• Certain product aspects may be altered so SOME consumers perceive more benefit
• Some consumers may not perceive increased benefit
• A few consumers may perceive reduced benefit

Question 6

What is the main problem for consumers in the “Shopping Problem”?

Answer 6

Consumers’ problem is to find the seller offering the highest B-P

Question 7

How can consumers search for the highest B-P?

Answer 7

• Sequentially
• Simultaneously

Question 8

What is a characteristic of sequential searchers?

Answer 8

Sequential searchers

• often have a “threshold” B-P and
• will buy from the first seller exceeding the threshold.

Question 9

How has the rise of the internet affected search costs and consumer behavior?

Answer 9

• has reduced search costs, allowing most consumers to search simultaneously
• This reduces the elasticity of demand facing sellers (means that the elasticity of demand is becoming more inelastic, bc consumers are now more likely to be aware of all options, regardless of the price)

Question 10

What are the characteristics of a search good? name exmaples

Answer 10

• Consumers can easily compare product characteristics
• Search goods are often commodities and
• consumers choose solely on the basis of price.

Question 11

What are the characteristics of a experience good? name exmaples

Answer 11

• Consumers cannot easily compare produc characteristics and value information
• Consumers do learn about quality after purchasing and using product
• Examples: Restaurant, Konzert, vacation or trips

Question 12

What are the characteristics of a credence good? name exmaples

Answer 12

• Consumers cannot easily evaluate quality even after purchasing and using the product
• financial products, expert services, legale advice

Question 13

What does the Theory of Unraveling suggest about firms and their quality disclosure?

Answer 13

suggests that ALL firms, even the worst, will disclose their quality

Question 14

What must sellers be able to do according to the Theory of Unraveling?

Answer 14

Sellers must be able to cheaply and accurately assess their own quality.

Question 15

What is the disclosure process according to the Theory of Unraveling?

Answer 15

• The best self-discloses first to gain an advantage
• The second best self-discloses to not be considered the worst
• This process continues down to the worst in class (each disclosing to not be considered the worst).

Question 16

What are the assumptions of the Theory of Unraveling?

Answer 16

• Sellers can cheaply and accurately assess their own quality and their market position relative to others
• Consumers have reasonable beliefs about the distribution of quality

Question 17

What are the alternatives to disclosure of quality?

Answer 17

• Firms can offer warranties (this signals quality BUT may prove costly if the quality is poor)
• Product quality can be promoted through branding (associates products with attributes; assures consistency)

Question 18

What is a warranty in the context of quality disclosure?

Answer 18

A warranty is a signal of quality.

Question 19

When are signals like warranties informative? What is the situation for low-quality firms?

Answer 19

Signals are informative only:

• if it is more profitable for the highquality firm to offer the signal
• Low quality firms cannot afford to offer warrantees and differentiate themselves by this omission

Question 20

How do brands help consumers in terms of product attributes

Answer 20

Brands help consumers associate product names with product attributes.

Question 21

When are brands informative signals of quality?

Answer 21

Brands are informative signals of quality

• if it is more profitable for a high-quality seller to give the signal

Question 22

What is the consumers’ reasoning regarding advertising and quality?

Answer 22

• Advertising is expensive
• The firm will not recover those costs unless the product is sold in high quantity
• High quantity sales only occur if the product is of high quality

Question 23

How else might consumers infer product quality?

Answer 23

Consumers may also infer quality from the reputation of the retailer or from the brands that it carries.

Question 24

What happens if consumers believe managers and owners are unable to profit from deception about quality?

Answer 24

• If consumers believe managers and owners are unable to profit from deception about quality,
• they believe incentives by firms to skimp on quality disappear.

Question 25

What is the relationship of consumers and experience goods?

Answer 25

Consumers are skeptical of the quality of experience goods.

Question 26

In which industries are nonprofit organizations common, and why?

Answer 26

= common in the healthcare and education industries where products are mostly credence goods.

Question 27

What do independent firms codify in the context of report cards?

Answer 27

Independent firms codify quality evaluation.

Question 28

What value do certifiers create with report cards?

Answer 28

create value for the consumer and capture profits for themselves.

Question 28

Give three examples of independent certifiers. (Reprot cards)

Answer 28

• Underwriters Bureau
• Consumer Reports
• Car and Driver

Question 29

How do consumers benefit from report cards?

Answer 29

• Consumers can easily identify high-quality sellers
• The elasticity of demand with respect to quality increases and gives sellers an incentive to improve quality
• Report cards improve sorting by matching consumers who value quality to the best sellers

Question 30

How does noise affect report card scores?

Answer 30

• Nearly all measures of quality are subject to random noise, Because of noise, the highest quality seller may not receive the highest rating
• Even with noise, consumers will steer towards the higher ranking sellers

Question 31

What is the impact of selection on report card scores?

Answer 31

• If a report card score depends on input from the customer, sellers may shun some customers to boost their score