Contesting fake news

TL;DR

This paper models the strategic competition among firms in credence goods markets where they influence the quality labels, affecting consumer decisions and market outcomes, with implications for various industries using rankings or certifications.

Contribution

It introduces a game-theoretic model of firms competing to control label precision in credence goods markets, highlighting strategic manipulation of information.

Findings

Firms strategically amplify or suppress information to influence label accuracy.

The model applies to industries like academia, green certification, and entertainment.

Strategic behavior impacts the reliability and usefulness of product labels.

Abstract

We model competition on a credence goods market governed by an imperfect label, signaling high quality, as a rank-order tournament between firms. In this market interaction, asymmetric firms jointly and competitively control the aggregate precision of a label ranking the competitors' qualities by releasing individual information. While the labels and the aggregated information they are based on can be seen as a public good guiding the consumers' purchasing decisions, individual firms have incentives to strategically amplify or counteract the competitors' information emission, thereby manipulating the aggregate precision of product labeling, i.e., the underlying ranking's discriminatory power. Elements of the introduced theory are applicable to several (credence-good) industries that employ labels or rankings, including academic departments, ``green'' certification, movies, and investment opportunities.