Three Essays on Market Strategy with Incomplete Information

Abstract The development of information technology is reshaping the market in which economic agents make decisions based on incomplete information which in the past may reduce market efficiency but nowadays is no longer a big problem when more information could be acquired. How would this change affect market behavior is still under explored. This dissertation explores two distinct topics that are related to information disclosure: third-party product rankings and return policies. Specifically, the first essay investigates the market strategy of a product expert who sells the product ranking to incompletely informed consumers. The model indicates that the expert may not always have incentive to rank products consistent with consumer preferences, especially when the ranking could influence consumer utility. We find evidence for this argument from a laboratory experiment. This type of third-party product ranking may influence not just consumers but also firms whose products have been reviewed. Under this circumstance, I model firms' advertising strategies in the second essay, and find that when their product quality has been disclosed by the third-party firms may rely more on persuasive advertising of certain attribute to influence consumers' preference. Essay 3 examines a retailer's optimal product return policy within an environment in which consumers differ in their product return propensities. The retailer may benefit from a discriminated return policy based on consumers' differential return behaviors which can be revealed by their purchase history.