Fit, Quality and Optimal Blurring of Advertising -with Jong Jae Lee
: Two Attributes of Goods and Bayesian Persuasion (under revision)
[ABSTRACT] This paper studies a duopoly market in which firms compete in their strategic decisions regarding how much information to disclose to consumers who are uncertain about the fit between their personal tastes and the product's horizontal attributes. Because the fit information is not available before purchase, firms participate in fit revelation activities such as advertising, free trials, consumer reviews, or return policies. Specifically, we study how (i) the quality difference between firms, and (ii) the different market channels, namely offline and online, shape the optimal fit revelation activities. Our results reveal that in the brick-and-mortar business, the low quality firm provides more information on fit than high quality firm unless the quality gap between the two is large. On the other hand, in an online competition, the high quality firm sends out bluffing signals, whereas the low quality firm discloses unfavorable fit information.