Product Fit Uncertainty and Information Provision in a Distribution Channel

Abstract

Consumers of experience goods typically face some uncertainty about the fit between their tastes and the features of products being o¤ered. 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. We show that whether a manufacturer selling through retailers is more or less likely to disclose fit information compared to a manufacturer selling directly to consumers depends on the degree of retail competition. If the disclosure decisions are made before the manufacturer sets its wholesale price, then all channel members want to disclose fit information for low-quality products, no one wants to disclose it for medium-quality products, and only the retailers prefer to disclose fit information for high-quality products. This disclosure conflict for high-quality products can be resolved if the manufacturer can commit to a wholesale price before the disclosure decisions. The retailers also then prefer to not disclose fit information for high-quality products. Regardless of whether the wholesale price is set before or after disclosure decisions, a 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.