Quality Testing and Product Rationing by Input Suppliers

Abstract

Q uality testing by suppliers has significant ramifications for downstream supply chain participants and retail consumers. This article focuses on such implications accounting for the fact that suppliers often enjoy discretion in quality testing and reporting. Under a discretionary testing and reporting environment, we show that a supplier can improve the market's perception of product quality by engaging in self-imposed production cuts. Production cuts dampen supplier incentives to engage in excessive quality testing, putting the supplier and the market on a more equal information footing. This reduces the market's need to skeptically discount product quality to protect itself. The improved market perception, then, reduces quality testing demand, introducing cost savings. The result that costly production cuts can improve quality perceptions indicates that the groundwork for influencing market perceptions may have to be laid upfront, even prior to acquiring private information, providing a contrast to routine signaling models.

The Acquisition of Quality Information in a Supply Chain with Voluntary vs. Mandatory Disclosure

“…This setting regarding the information acquisition cost is in line with the related literature (e.g., Arya et al. , Li and Peeters , Shavell ).…”

“…Moreover, Matthews and Postlewaite (1985) and Shavell (1994) indicate that uncertainty in information acquisition can also stop unraveling. Arya et al (2014) study the manufacturer's production decision in a discretionary quality testing and reporting environment. They find that production cuts can improve the buyer's quality perception and dampen the manufacturer's incentive to conduct excessive quality testing.…”

“…In the basic model, we assume that all the parties including the manufacturer do not know the precise quality information of his product ex ante, a setting that has been frequently adopted by the prior literature such as Matthews and Postlewaite (1985), Shavell (1994), Arya et al (2014), Yehezkel (2014), Dahm et al (2009Dahm et al ( , 2016. Nonetheless, it is also reasonable to assume that the upstream manufacturer, who is involved in the production process, may privately possess some superior knowledge about his product quality.…”

Secondhand product quality disclosure strategy of the retailer under different supply chain structures

“…An extensive review of this stream of literature can be found in Guan and Chen (2015). Arya et al (2014), Clottey andBenton (2020), andGuan et al (2020) also consider the disclosure and sharing of quality information. Kuksov and Lin (2010) develop a game-theoretic model and examine the interaction of information provision, product quality, and pricing decisions by competitive firms.…”

Virtuous spillover effects of quality penalties on the continuity of health care

“…The HRRP quality penalties targeted a few key ailments because comprehensive regulation would be prohibitively complex and cognitively cumbersome, which defeats its ability to provide information for decision making (Arya et al., 2014). The regulatory design that targets an outcome (readmission) of a few ailments facilitates our empirical analysis with respect to the identification of intra‐ailment effects.…”