In recent years, blockchain technology has emerged as a powerful tool for enhancing transparency and trust across various industries. Yet, its adoption creates complex strategic dynamics within competitive markets, as firms grapple with choices between traditional advertisement methods and the innovative potential of blockchain-based information disclosure. A groundbreaking study by Huang, Cao, Zhou, and colleagues delves deeply into this interplay, employing a classical Hotelling competition framework to analyze how blockchain adoption reshapes industry profits, social welfare, and consumer surplus.
Central to the study is the exploration of various equilibrium outcomes when firms decide between two strategies: option a representing traditional advertisement and option b symbolizing blockchain adoption. While multiple equilibria are possible —for instance, one firm choosing advertisement and the other blockchain—the research examines the scenario where firm 1 adopts advertisement and firm 2 opts for blockchain, noting that this assumption does not restrict the generality of the findings. The key insights focus on aggregated performance indicators, essential to assessing the broader market effects.
Industry profit emerges as a pivotal factor in the analysis. When both firms choose advertisement, total industry profit is characterized by a piecewise function dependent on the advertising cost rate (k). Specifically, profits decrease as the costs rise but remain positive within certain cost thresholds. When both firms adopt blockchain, the profit expression simplifies, involving a fixed cost term (F) reflective of blockchain deployment expenses. For mixed equilibria, where one firm advertises and the other embraces blockchain, profits present a more intricate dependence on (k), highlighting the tension between competition and disclosure costs.
The researchers present Lemma 1, which delineates conditions under which blockchain adoption yields higher industry profits compared to traditional advertisement. Critical thresholds for the fixed cost (F) are provided, conditional on the advertising cost rate (k) and other model parameters, such as transportation cost (t) and consumer preference differentiation (l). However, due to the mathematical complexity, numerical simulations supplement the theoretical results, illustrating how these thresholds evolve with changing cost parameters.
Social welfare, defined as the aggregate of consumer surplus and industry profits, offers another lens through which blockchain’s impact is assessed. In Lemma 2, the authors specify conditions where adopting blockchain, either by both firms or by one, enhances social welfare relative to a scenario where both firms rely on advertisement. These welfare thresholds incorporate the costs of blockchain adoption and advertising, balancing efficiency gains from altered market competition against disclosure expenses.
Intriguingly, the study reveals that while blockchain adoption tends to increase social welfare under moderate cost conditions, excessive advertising cost rates (k) and high blockchain fixed costs (F) can reverse this benefit. This trade-off arises because blockchain enforces truthful and fixed positioning by firms, which softens price competition and elevates producer surpluses, contributing positively to overall welfare. Yet when the costs of information disclosure surpass these gains, total welfare shrinks, underscoring the nuanced nature of transparency’s economic effects.
An especially captivating insight emerges when evaluating consumer surplus. By definition, consumer surplus equals social welfare minus industry profits, representing the net benefit consumers derive after accounting for production returns. When both firms uniformly employ either advertisement or blockchain, consumer surplus remains unchanged, reflecting symmetric competitiveness and market structure. However, in mixed strategies where only one firm adopts blockchain, consumer surplus conspicuously declines.
This counterintuitive finding—that enhancing information transparency can diminish consumer welfare—stems from the strategic responses of competing firms. With one firm committing to blockchain disclosure and fixing its true attributes, its rival leverages advertisement to exaggerate or modify perceptions, adopting more extreme positioning to differentiate products and soften price rivalry. This strategic differentiation inflates equilibrium prices and increases the mismatch cost experienced by consumers purchasing from the advertiser, as perceived quality diverges from reality.
Consequently, despite the availability of more accurate information from the blockchain adopter, consumers face the brunt of higher prices and increased dissatisfaction due to mismatches with advertised attributes. The coalition of these effects results in a lower overall consumer surplus, which numerical analyses confirm across diverse parameter spaces. This intricate interaction spotlights how enhanced transparency, contrary to initial expectations, may paradoxically disadvantage the very consumers it aims to empower.
The findings align with emerging literature exploring the unintended consequences of transparency technologies. Prior work by Liu et al. noted similar phenomena where better-informed markets could precipitate adverse consumer outcomes through intensified market power or strategic behavior. Huang and colleagues thus contribute a rigorous formalization within the Hotelling framework, marrying economic theory with blockchain’s practical implications.
Importantly, this research underscores that blockchain’s benefits are not universally guaranteed; they critically depend on the underlying cost structures and market differentiation parameters. Firms and policymakers must weigh the efficiency gains from market transparency against the potential inflation of disclosure and advertising expenses, balancing technological adoption with competitive dynamics.
Moreover, the study’s nuanced equilibrium analysis serves as a cautionary tale for companies considering blockchain integration. While transparency may enhance firm profit margins and overall welfare under certain conditions, it may simultaneously unravel consumer gains, potentially eroding brand loyalty or market trust in the long term.
This exploration also raises poignant questions about regulation and consumer protection in technologically evolving markets. Should blockchain disclosures be mandated, or is a hybrid approach with traditional advertising more prudent? What roles do fixed adoption costs and consumer preference heterogeneity play in shaping optimal informational strategies? The research ignites essential dialogues about the future pathways of market transparency.
Overall, the authors’ approach, combining rigorous mathematical modeling with comprehensive numerical simulations, offers valuable insights that transcend purely theoretical discourse. By quantifying the thresholds at which blockchain’s adoption shifts from beneficial to detrimental across several metrics, the study equips stakeholders with actionable knowledge.
In a marketplace increasingly transitioning to digital infrastructures, understanding these intricate cost-benefit landscapes is paramount. Blockchain’s promise as a transparency-enhancing innovation must be harnessed judiciously, mindful of its capacity to alter competitive equilibriums and ripple through consumer welfare.
As the industry contemplates blockchain deployment, these findings suggest a tailored strategy aligned with advertising cost rates, product differentiation factors, and fixed costs. Such calibration could preserve overall social welfare, enhance industry profits, and avoid unintended burdens on consumer wellbeing.
In sum, this compelling research reframes blockchain adoption not merely as a technological upgrade but as a strategic market decision fraught with complex economic trade-offs. It advances the discourse on how transparency technologies recalibrate industry structures and consumer experiences, offering empirical and theoretical guidance for future innovations and policy frameworks.
Subject of Research: The economic impact of blockchain adoption on industry profits, social welfare, and consumer surplus within competitive markets using a Hotelling competition model.
Article Title: Information disclosure in Hotelling competition: advertisement vs. blockchain
Article References: Huang, W., Cao, X., Zhou, W. et al. Information disclosure in hotelling competition: advertisement vs. blockchain. Humanit Soc Sci Commun 12, 1797 (2025). https://doi.org/10.1057/s41599-025-06069-z
Image Credits: AI Generated
DOI: https://doi.org/10.1057/s41599-025-06069-z
