A new mechanism for product tests à la Consumer Reports, Stiftung Warentest and Co. – Adopting a long-term perspective with endogenous price and quality, and unknown distribution of quality

• Applicant: Dr. Ulrike Vollstädt
• Subject Area: Economic Policy, Applied Economics
• Term: from 2019 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 418290340

Sellers are often better informed about product quality than buyers. To reduce this asymmetric information and to help buyers, product testing organizations like Consumer Reports (US) or Stiftung Warentest (Germany) have been established. Although they provide credible information, this information may not be optimal. Due to limited testing capacities, certain product models (e.g. certain smartphone modells among all available ones) have to be selected for a test. For instance, Stiftung Warentest selects mainly the bestselling product models, arguing that buyers would be interested most in learning about the bestsellers' quality. However, there may be product models among the non-tested ones which dominate the tested product models (e.g. are less expensive given the same quality).We propose a new, capacity-neutral mechanism to select product models for a test. Our mechanism allows sellers to apply to the product testing organization with a product model, stating price and quality. The product testing organization then selects the product models to be tested among the applicants according to a pre-specified algorithm, allowing sellers to voluntarily disclose their product quality. In a preliminary experimental study (Vollstädt, Brendel, Ehses-Friedrich, mimeo), we compared two benchmark treaments: a stylized version of Stiftung Warentest’s current mechanism and our new mechanism. We showed that our mechanism leads to product tests with more information on non-dominated product models. Therefore, consumer surplus as well as profits of certain sellers increase.While these preliminary results are very promising, they rely on several strong assumptions. The goal of the present research proposal is to gradually increase the external validity of our results by relaxing two major assumptions. In project 1, I plan to relax the assumption that price and quality are exogenous. To achieve this, I will extend the static, short-term game used in the preliminary study to a dynamic, long-term game in which price and quality are endogenous. Will our new mechanism, even with endogenous price and quality, perform better than a stylized version of Stiftung Warentest’s mechanism? Moreover, will our new mechanism lead to a supply of better product models (e.g. less expensive product models given the same quality)? In project 2, I plan to relax the assumption that buyers and sellers know how product quality is distributed. This assumption is made in all related studies on voluntary information disclosure and also in our preliminary study. Yet, this assumption does actually neither hold for most buyers, nor for all sellers. Will our new mechanism perform better than a stylized version of Stiftung Warentest’s mechanism even if the distribution of product quality is unknown?

• DFG Programme: Research Fellowships
• International Connection: USA
• Host: Professorin Yan Chen, Ph.D.