How Do Firms Respond to Third-Party Information with Quality Information Provision Strategies?

Problem definition: Given that consumers’ product quality expectation nowadays is often affected by some third-party information (TPI) such as online reviews and by the product producer, we investigate how a firm, faced with a regulatory penalty for false claims in reporting its private quality information, uses its quality information provision (including both acquisition and reporting) strategy to consumers in response to TPI. Methodology: We build a signaling game-theoretical model to describe the firm’s quality information provision strategy, and we use two copulas in the Frechet family to capture the precision of the information from the third-party and the firm. Results: We characterize the perfect Bayesian equilibriums (PBEs) in both favorable and unfavorable TPI cases. Based on these PBEs, we prove that under either favorable or unfavorable TPI, the firm would acquire and truthfully report perfectly precise quality information to consumers if and only if its quality information acquisition cost is low enough. Managerial implications: Comparing to favorable TPI case, we find that although unfavorable TPI strengthens the firm’s incentive to provide perfectly precise information to consumers, the firm is always worse off. Moreover, an increase in the precision of unfavorable (favorable) TPI weakens (strengthens) the firm’s incentive to truthfully report and leads to a lower (higher) profitability for the firm. Furthermore, the firm’s truthful-report commitment is non-credible in the case of high information acquisition cost. Finally, we show when the information acquisition cost is low enough, the firm benefits from its quality information provision strategy relative to the price-only strategy.