Quality disclosure and unauthorized channel choice

Abstract

When a manufacturer sells products in two markets, its retailer may create an unauthorized channel to divert products between markets. This paper develops game models to investigate quality disclosure strategy of a manufacturer facing an unauthorized channel. We find that: if the cost of creating an unauthorized channel is high, or consumers’ acceptance degree of gray market product and the difference in consumers’ willingness to pay between markets are low, the manufacturer should conceal quality information to prevent unauthorized channel; if the three parameters are medium, the manufacturer should disclose quality information, and the retailer has a certain possibility to create an unauthorized channel; if the cost is low, or consumers’ acceptance degree and the difference between markets are high, the manufacturer should conceal quality information to save disclosure cost and allow unauthorized channel. When the retailer chooses quality disclosure strategy, it may voluntarily promise not to create an unauthorized channel.