Strategic Quality Decisions by Heterogeneously Informed Suppliers

In a differentiated oligopoly market, it is often the case that consumer’s ex post preferences over different product qualities depend upon the state of nature which is not yet observable to the consumers at the time of purchase. One of the most typical examples is a market for durable goods or long-term service contracts, where the state is indeed a future state which has not yet realised when the transaction is made. to analyse such situations, this paper models a two-stage game, in which multiple suppliers move first to choose the quality of their products based upon their idiosyncratic information about the state. Consumers then observe these products, update their beliefs about the state. and decide which products to purchase. Counter intuitively, suppliers’ incentives to reveal their private information are higher when there is a fraction of consumers whose prior about the state is moderately inaccurate, then when every consumer has better prior information. Hence the presence of such “noise consumers” can make all consumers better off, even indluding noise consumers themselves.