Product Fit Uncertainty and Information Provision in a Distribution Channel

Production and Operations Management, 2020

Monic Sun and Rajeev K. Tyagi

Abstract

Consumers of experience goods typically face some uncertainty about the fit between their tastes and the features of products being offered. For example, a consumer may not know how well a stroller, magazine, eye glasses, an electronic gadget, etc., will fit their specific taste. Information technology has given consumers the ability to conduct research online about their potential fit with products before buying, and modern sellers the ability to disseminate product information to consumers. This paper investigates a manufacturer's and retailers' incentives to disclose such product fit information to consumers when the manufacturer sells to consumers through competing retailers. It shows that if disclosure decisions have to be made before the manufacturer sets its wholesale price, then (i) all channel members want to disclose fit information for low-quality products; (ii) no channel member wants to disclose for medium-quality products; and (iii) only the retailers, not the manufacturer, want to disclose for high-quality products. If the manufacturer however commits to a wholesale price before disclosure decisions, then disclosure of fit information will occur only for low-quality products. Regardless of the relative timing of wholesale price and disclosure decisions, any mandatory product-fit disclosure policy can decrease consumer welfare and social surplus, depending on the level of product quality and the degree of retail competition.

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