Upstream Exploitation and Strategic Disclosure

Firms can improve market demand by disclosing privately-known information on their advantages (e.g., quality) to potential buyers. The conventional prediction in the literature on voluntary disclosure is that, due to rational buyer expectation, any private information would be perfectly unravelled in equilibrium. However, concealments can be seen in practice for both low- and high-quality firms. This paper proposes a new explanation for this puzzle, based on downstream manufacturers' incentive to mitigate upstream exploitation by input suppliers. We highlight two natural consequences of increasing quality: higher product value and less elastic demand. The latter force would push up the wholesale price to yield a non-monotonic impact of quality on equilibrium manufacturer payoff. Therefore, there may exist intermediate-disclosure equilibria where the manufacturer withholds both low and high quality levels, even when disclosure is costless. In addition, partial disclosure can benefit not only channel members but also buyers. The intermediate-disclosure equilibria can survive even when supplier actions to influence the disclosure outcome are endogenized. Moreover, strategic concealment may undermine incentives for vertical integration.