Quality Disclosure and Product Selection

If entry requires accommodation by retailers, an incumbent manufacturer may transfer profits to retailers to maintain his dominant position. We show that such an incentive to transfer will induce a high-quality entrant to disclose quality information prior to entry. Interestingly, retailers will accommodate not only a high-quality entrant but also an intermediate-quality entrant who chooses not to disclose. If disclosure is mandatory, however, only a high-quality entrant can enter the market. Therefore, mandatory disclosure may be excessive in terms of consumer welfare.