Seminar_20230419
Encourage Voluntary Certification by Mandatory Disclosure in Search Market
5/31/23 | 12:00pm | MHL 224
Dr. Chang Dong, Assistant Professor
Durham University Business School
Abstract: Firms usually seek quality certification and share it with consumers to help them make purchases. The purpose of this paper is to examine firms’ incentives to pursue voluntary quality certification under monopolistic competition. We adopt the classic sequential search framework where consumers are not perfectly informed of competitive offerings but can exert costly effort to gather purchase-related information. Here, consumer search cost serves as a natural measure of competition intensity. We first show that fierce competition may encourage or discourage quality certification depending on the net effect of two conflicting forces. On the one hand, intense competition erodes firms’ profitability gains from disclosing high-quality certificates. On the other hand, it also increases consumer traffic that benefits the high-quality certificated firms more. More importantly, we evaluate the disclosure regulation regarding quality certification. Specifically, we demonstrate that a mandate requiring firms to disclose any certification outcome, whether it is positive or negative, can encourage quality certification under severe competition. This is in sharp contrast to the conventional wisdom that without the option to conceal the bad news, firms have a tendency to hold off on learning it initially. Our striking result is due to mandatory disclosure’s countervailing effect in making consumers more selective in the search process, which leads to higher consumer traffic and eventually encourages quality certification.
Bio: Chang is an Assistant Professor in Operations Management, Durham University Business School. His current research focuses on using game theoretical models to analyse business decision-making on topics including supply chain management, operations-marketing interface, innovation and new business models.
Event Time and Venue: May 31, 2023-12:00pm, MHL 224
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