Quality Investment With Information Acquisition Transparency

Abstract

This paper investigates the interplay between a firm's product quality investment and subsequent product quality information acquisition. We consider two quality information acquisition scenarios: non-transparent acquisition scenario and transparent acquisition scenario, depending on whether the quality information acquired by the firm is observable to the public. We show that under the non-transparent acquisition scenario, the firm's equilibrium quality investment decision and quality information acquisition decision are strategic complements, and these decisions can significantly affect consumers' inferences on product's quality level. More importantly, we uncover that in comparison with the scenario where firm's quality information acquisition is transparent to the consumers, when the quality information acquisition is non-transparent to the consumers, the firm chooses a higher quality investment level and has more incentive to conduct the acquisition of precise quality information by incurring an extra cost after the quality investment decision-making, which eventually leads to an increase in consumer surplus but may result in a decrease in social welfare.