Lecture Unit 9: Information Disclosure and Strategy (1/2) Flashcards
What are the 2 ways, firms can enhance the benefits of their productsß
- Vertical differentiation
- Horizontal differentiation
What is meant with disclosure?
- informing consumers about a products benefits
What does vertical differentiation do?
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)
Vertical differentiation: How is quality signaled?
- Disclosure
- Warrantees
- Branding
- Non-profit status
What does horizontal differentiation mean?
- 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
What is the main problem for consumers in the “Shopping Problem”?
Consumers’ problem is to find the seller offering the highest B-P
How can consumers search for the highest B-P?
- Sequentially
- Simultaneously
What is a characteristic of sequential searchers?
Sequential searchers
- often have a “threshold” B-P and
- will buy from the first seller exceeding the threshold.
How has the rise of the internet affected search costs and consumer behavior?
- 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)
What are the characteristics of a search good? name exmaples
- Consumers can easily compare product characteristics
- Search goods are often commodities and
- consumers choose solely on the basis of price.
What are the characteristics of a experience good? name exmaples
- 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
What are the characteristics of a credence good? name exmaples
- Consumers cannot easily evaluate quality even after purchasing and using the product
- financial products, expert services, legale advice
What does the Theory of Unraveling suggest about firms and their quality disclosure?
suggests that ALL firms, even the worst, will disclose their quality
What must sellers be able to do according to the Theory of Unraveling?
Sellers must be able to cheaply and accurately assess their own quality.
What is the disclosure process according to the Theory of Unraveling?
- 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).
What are the assumptions of the Theory of Unraveling?
- 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
What are the alternatives to disclosure of quality?
- 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)
What is a warranty in the context of quality disclosure?
A warranty is a signal of quality.
When are signals like warranties informative? What is the situation for low-quality firms?
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
How do brands help consumers in terms of product attributes
Brands help consumers associate product names with product attributes.
When are brands informative signals of quality?
Brands are informative signals of quality
- if it is more profitable for a high-quality seller to give the signal
What is the consumers’ reasoning regarding advertising and quality?
- 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
How else might consumers infer product quality?
Consumers may also infer quality from the reputation of the retailer or from the brands that it carries.
What happens if consumers believe managers and owners are unable to profit from deception about quality?
- If consumers believe managers and owners are unable to profit from deception about quality,
- they believe incentives by firms to skimp on quality disappear.
What is the relationship of consumers and experience goods?
Consumers are skeptical of the quality of experience goods.
In which industries are nonprofit organizations common, and why?
= common in the healthcare and education industries where products are mostly credence goods.
What do independent firms codify in the context of report cards?
Independent firms codify quality evaluation.
What value do certifiers create with report cards?
create value for the consumer and capture profits for themselves.
Give three examples of independent certifiers. (Reprot cards)
- Underwriters Bureau
- Consumer Reports
- Car and Driver
How do consumers benefit from report cards?
- 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
How does noise affect report card scores?
- 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
What is the impact of selection on report card scores?
- If a report card score depends on input from the customer, sellers may shun some customers to boost their score
