Worried about Adverse Product Effects? Information Disclosure and Consumer Awareness

Abstract

Whether consumers are aware of potentially adverse product effects, is key for private and social incentives to disclose information. To obtain a better understanding of this issue we propose a simple monopoly model that highlights the conceptual difference between consumer unawareness and consumer uncertainty. We show that total surplus may be larger in an environment in which consumers are unaware of the potentially adverse effect. We also show that disclosing information whether a particular ingredient is harmful or not increases consumer surplus, but mandatory disclosure of the level of this ingredient may make consumers worse off.

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Reference

Sanxi Li, Martin Peitz, and Xiaojian Zhao, “Worried about Adverse Product Effects? Information Disclosure and Consumer Awareness”, TSE Working Paper, n. 10-157, May 12, 2010.