Competition, Disclosure and Signalling

Competition creates strategic incentives for firms to communicate private information about product quality through signalling rather than voluntary disclosure. In a duopoly where firms may disclose quality before setting prices and prices may signal quality, non‐disclosure by all firms may often be the unique symmetric outcome even if disclosure cost vanishes. A high‐quality firm may not disclose even if it has strong competitive advantage over a low‐quality rival. This provides an alternative explanation of infrequent voluntary disclosure. Although product information is always communicated whether or not firms disclose, signalling distortions may provide a rationale for mandatory disclosure regulation.