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The decision to disclose product information to potential customers is something that must be considered by sellers. Common methods that are used to present quality information include advertisements, free samples, product labels, and so on. Alternatively, for various reasons, a seller might choose to reduce their investment in advertising or limit certain information about their product.

A seller may choose to invest more in advertising if the product is good quality, with the aim of attracting more consumers and earning more profit. However, for a low-quality product, it might be more beneficial for a seller to conceal certain information to avoid the possibility of consumers forming negative impressions.

A number of studies have shown that it is difficult for a seller to withhold negative quality information, unless consumers are naive or information disclosure is very costly. The reason for this is simple: if a rational consumer feels that a seller is holding back product information, they will assume that the product’s quality is poor. Yet, many successful companies use the strategy of information withholding and limited advertising for their products. However, spending less on advertising could be due to the increasing popularity of online platforms and social media, which allows consumers to learn about products from other well-informed consumers online.

A study by Xu Guan, Yulan Wang, Zelong Yi, and Ying-Ju Chen aimed to investigate how consumers’ reference-dependent preferences impact a firms information disclosure decision. The areas of interest were based on various factors including how information disclosure affects purchasing decisions, and how quality evaluations from other consumers influence quality evaluations and purchasing decisions. From the seller’s perspective, the study also examined how a consumer’s type and references-dependent preferences jointly affect a seller’s voluntary disclosure strategy, as well as the impact of consumer type and reference-dependent preferences on the seller’s performance.

In their study, the researchers investigated “the strategic interactions between a monopolistic seller holding private quality information and two groups of reference-dependent consumers who arrive in two periods (an early adopter and a follower).” In their model, the seller must decide whether voluntary disclosure should take place in advance. In terms of the consumers, they were either sophisticated or naive, which depended on whether they could make rational inferences based on the seller’s disclosure behaviour and the reference-dependent subjective quality assessment posted by the early adopter.

Their results showed that when consumers are naive, the seller can strategically withhold high-quality information, while at the same time disclose low-quality information to boost the reference dependent early adopter’s subjective quality review. By doing so, the follower’s quality expectation is enhanced, allowing the seller to make more profit in the second period. However, when the consumers are sophisticated, it becomes more difficult for the seller to enhance their quality expectations by designing a disclosure strategy to manipulate the quality review of the early adopter. When both naive and sophisticated consumers are considered at the same time, the seller can withhold relatively low-quality information in advance. As a result, the seller only serves naive consumers in the first period by charging a higher price.