Persuasion Contest: Disclosing Own and Rival Information

This paper investigates a contest in information revelation between firms that seek to persuade consumers by revealing positive own information and negative information about the rival. In the face of limited bandwidth, firms are forced to make a tradeoff between disclosing their own positive information and their rival’s negative information. A negative-communication equilibrium, in which firms disclose rival’s negative information whenever possible, exists when consumers have poor outside options or when firms are better informed. Bandwidth limitations make competitive firms more likely to disclose information compared with when they have no limitations. When firms strictly prefer consumers to choose the outside option over the rival (as in political contests), there is a greater prevalence of the negative-communication equilibrium while the incidence of positive communication is lowered. Competition in information disclosure leads to greater consumer surplus compared with the unilateral disclosure case, whereas bandwidth limitations reduce consumer surplus. Finally, when firms are asymmetric in their ex ante quality valuations, the higher quality firm is less likely to engage in negative communication.