Should a retailer disclose its unit variable costs in monopoly and duopoly markets

Should a retailer disclose its costs to socially conscious consumers who are concerned about perceived unfair pricing practices? While disclosing costs can build consumer trust through transparency, it may also lead to resentment if the actual profit margin, deduced from the disclosed costs, is perceived as excessively high. By incorporating key findings from behavioral experiments in the literature, we present an exploratory model to examine if and when a firm should disclose its costs in both monopoly and duopoly markets. Assuming that consumers use the concept of rational expectation equilibrium to infer the firm's actual costs when they are not disclosed, our equilibrium analysis yields the following results that provide insights when a retailer should adopt cost disclosure. Specifically, in the monopoly model, we find that consumers tend to overestimate the firm's true costs when the firm does not disclose them. This occurs because consumers use the observed price as a "signal" about the undisclosed true cost, and believe that the firm would set its price closer to the true cost. Also, a monopoly should not disclose its true costs to prevent pressure to lower its profit margin, especially when consumers are highly concerned about the firm's profit margin. This behavior persists in the duopoly model. In the duopoly model, we find two additional results: as competition intensifies, both firms are more likely to disclose their true costs in equilibrium to gain additional trust from consumers. However, when competition is moderate but the cost differential between firms is sufficiently high, only one firm would disclose its true costs in equilibrium.