Consider a market in which firms have private information about their quality s ∈ [0, 1]. Quality is drawn from the uniform distribution on the 0-1 interval; this is common knowledge among firm and consumers. After observing its type the firm decides whether to reveal its quality to consumers (it has the choice whether or not to reveal its quality but not to mislead; a justification is that the firms sends a sample to a certifying authority for testing but that publishing the test result is within its own control) and sets a price p. Consumers derive utility u = s^e - p, where se denotes the expected quality.

1. Suppose the government mandates information disclosure. Characterize the solution to the firm’s pricing problem.

2. Suppose now that the firm can reveal information at zero cost. Characterize the solution to the firm’s pricing and information disclosure problem.

3. Suppose now that there is a dislosure costs k > 0. Characterize the solution to the firm’s pricing and information disclosure problem as a function of k.

4. Above which level of k will the firm never disclose private information?