Prepurchase Information Acquisition and Credible Advertising

Consumers can decide whether to acquire more information about their valuations prior purchase. In this paper, we examine pricing and advertising strategies when consumers engage in prepurchase acquisition. We show that consumer acquisition increase valuation heterogeneity undermine a firm’s ability extract surplus. As result, interestingly, higher product quality exert nonmonotonic impact on equilibrium acquisition, hurt firm profitability, lead lower also demonstrate be an endogenous mechanism enable credible cheap-talk setting. claims advertisements informative even the freely misrepresent its message. Informative arise because perceived not only consumers’ expected value, but it induces thus hurts This novel explanation for credibility of is distinguished from those identified literature (e.g., matching between types heterogenous consumers, restrictive communication multidimensional attributes). Moreover, soften competition by inducing benefiting rival profitability. paper was accepted Matthew Shum, marketing.