Quality Disclosure Strategy under Customer Learning Opportunities
Operations Research and Operations Management
Han Zhu, Yimin Yu, Saibal Ray
Published in Production and Operations Management, October 2020
Quality is an important factor in determining both customers' willingness-to-pay and firm profits. However, for experience goods (e.g., products like consumer electronics, appliances, auto and services such as hotels), it is often difficult for customers to know the true quality without actually using them.
Potential customers can nowadays collect quality evidence via social media sites or user-generated content. Examples include websites like epinions.com, consumerreports.org, booking.com, mafengwo.cn, yelp.com, and Google as well as social media sites like Facebook, Whatsapp, and Instagram. Experimental and empirical studies show that customers' quality perceptions are indeed affected by other customers' experiences in a variety of sectors.
In this new research, Yimin Yu, Associate Professor, Department of Management Sciences
and co-authors study a firm's optimal quality disclosure strategy for experience goods whose quality cannot be easily assessed without usage, but for which potential customers can learn from experiences of past customers.
“We find that the incorporation of the learning behaviour significantly alters the optimal disclosure strategy of the firm from its single threshold structure in the extant literature to a multi-threshold policy,” says Yu.
Specifically, firms with high- or low-quality goods prefer not disclosing quality information; on the other hand, a medium-quality firm might disclose its quality level. This in fact is not uncommon in practice. For example, there is empirical evidence that medium-quality restaurants and business schools tend to disclose their quality.
The results suggest that when disclosure is expensive, high-quality firms are better off educating potential customers through advertising or social media, rather than disclosing their quality levels. They also suggest to policymakers that mandatory quality disclosure may not be socially optimal as more customers obtain quality information through peer learning.