Voluntary Cost Transparency in a Competitive Setting ( 2018 )
Associate Professor Lim Wei Shi
To generate and compete for product demand, firms usually promote product information (product functionality, product comparisons, product quality, selling price, warranty and returns policies, etc.) to create consumer awareness and to help consumers to make informed purchasing decisions. Besides “product promotion information”, most firms are tight-lipped about supply chain and cost related information. However, we are intrigued by the radical strategy implemented by a San Francisco-based apparel retailer Everlane.com who discloses its supply chain (input) costs (material and labour costs) as well as the average profit margin by other firms selling similar items. In general, the manufacturing cost of a product is a closely-guarded secret for two major concerns: (1) cost transparency can make a firm more vulnerable to competition; and (2) cost transparency can create unhappy consumers who feel that the firm’s profit margin is unreasonably high (i.e., the selling price is too high relative to the manufacturing cost). While many firms are keeping their cost information as trade secrets, third-party infomediaries now offer various product cost information online. As more infomediaries are offering cost estimates about different products, we wonder if a firm should disclose its cost information voluntarily.
In this project, we examine the following research questions. Firstly, does a monopoly benefit from voluntary cost transparency? If so, what are the key market parameters that determine the extent of the benefit? Secondly, under what conditions would competing firms adopt voluntary cost transparency? Would cost transparency undermine the competitiveness of the firm? To this end, we first develop a theoretical framework to examine if firms have incentives to adopt voluntarily cost transparency in a monopolistic setting. We then extend our analysis to a competitive setting. To validate our theoretical findings, we report on the results of our experimental findings.