Quality disclosure and competitor encroachment in advance selling

Manufacturers engaged in advance selling increasingly disclose quality information to mitigate valuation uncertainty and boost sales, but this introduces a great challenge because it may facilitate competitor encroachment. This study aims to investigate the strategic interplay between a manufacturer’s quality disclosure strategy and a competitor’s encroachment decision in advance selling settings. Our analysis shows that, when the manufacturer’s quality is relatively high, the threat of competitor encroachment will drive the manufacturer to be more proactive in quality disclosure, since the disclosed information can enable the competitor to make informed quality decisions, thereby achieving market segmentation and mitigating demand competition (i.e., competition-mitigation effect). In contrast, when the manufacturer’s quality falls below a particular threshold, the manufacturer may benefit from the threat of competitor encroachment (i.e., achieve a higher profit compared to the monopoly scenario) through the non-disclosure strategy. This occurs because consumers may perceive the manufacturer’s non-disclosure behavior as a strategy to fend off competitor encroachment rather than a signal of inferior quality, thereby leading to an enhancement in consumers’ expectations for product quality (i.e., expectation-improvement effect). This suggests that competitor encroachment is not always detrimental to incumbents and quality disclosure can serve as an effective means to regulate competition.