Quality Disclosure and Product Selection

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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.