Collective production of quality and consumers' perception

Abstract

In many cases consumers cannot observe firms' collective investment in quality, but have only perceptions of it. The outcome of the collective investment game of the firms is stochastic since firms cannot control perfectly all factors that may affect production. In such situations, we characterize the solution of the firm's investment decision problem. We show that the option value of the investment can be negative, and that firms would never want to acquire information on consumers' perception when the overall industry quality level is low. In this case, information disclosure by a third party would not foster quality accumulation. (with Fulvio Fontini and Michele Moretto)