Manufacturers who want to launch a new product or upgrade an old one would do well to consider the channels they use to disclose the product's quality to their consumers. Going down the wrong route may reduce profitability.

That's the recommendation of Liang Guo of HKUST, who constructed a model to look at the format options for disclosing information about product quality in a distribution channel involving a manufacturer and a retailer.

"The proliferation of new products, such as new cars, computers and fashions, has led increasingly to shorter product lifespan and consumer uncertainty about quality," he says.

"In these markets, quality disclosure is a means to address this problem, but the manner in which it is done varies significantly. Some manufacturers disclose product information directly to consumers, in other markets it is typically disseminated through downstream partners (retailers)."

"I sought to provide insights on the impact of the direct versus retail disclosure format on the revelation of quality information, as well as the payoff implications."

Guo finds that retailer disclosure, through such means as sales assistance and free samples, can result in more information being revealed and it can be more profitable because the manufacturer and the retailer share the total cost of disclosure through adjustments to the wholesale price. In particular, the wholesale price cannot be too high or the retailer will suffer a lower profit margin and thus have less incentive to boost consumer demand through quality information disclosure.

"If the wholesale price is too high, the marginal benefit of information revelation cannot compensate for the disclosure cost and the retailer is better off remaining silent," he says.

Interestingly, when the cost of disclosure gets relatively high, it is then preferable, and more profitable, for the manufacturer to disclose product quality information directly to consumers through such formats as traditional media, product labels or expert certification. "The manufacturer may prefer this format because it can give rise to a credible commitment not to disclose quality information levels that are relatively low. This preference is stronger when the disclosure cost becomes higher," Guo says.

"Therefore, if the fixed costs of implementing the different disclosure formats are not significantly different from each other, the manufacturer should choose the retailer-to-customer disclosure format if the cost of disclosure is relatively low. But when the disclosure cost is high, then direct disclosure is preferred."

Overall, Guo says the format that the manufacturer opts for can have a bearing on the amount of quality information revealed and on the manufacturer's overall payoff.

"Firms should be more conservative in disclosing their product's quality and reveal less information to consumers under the direct disclosure format. For example, national advertisements can focus less on quality-related product characteristics and more on other roles, such as increasing awareness and brand image development."

"On the other hand, firms can be more aggressive when they engage downstream firms for quality communication, adjusting downward the threshold of disclosure and revealing more information to consumers. They should also provide appropriate incentives to induce the downstream firm's disclosure efforts, such as strategically offer wholesale price cuts or trade promotions in support of the retailer's activities, such as product demonstrations and in-store advertisements," he says.