Communicating Quality: A Unified Model of Disclosure and Signaling

Abstract

Firms communicate product quality attributes to consumers through a variety of channels, such as pricing, advertising, releases of research reports and test results, or warranties and returns policies. The conceptualization of the economics of such communication is that it takes on one of two alternative forms when quality is exogenous: 1) disclosure of quality through a credible direct claim; 2) signaling of quality via producer actions that influence buyers¬π beliefs about quality. In general, these two literatures have ignored one-another. In this paper we argue that disclosure and signaling are two sides of a coin and that firms should be viewed as choosing which means of communication they will employ. Moreover, we show that integration of these two alternatives leads to a number of new implications about disclosure, signaling, firm preferences over type, and the social efficiency of the channel of communication employed.