Deceptive Advertising with Rational Buyers

Salvatore Piccolo (), Piero Tedeschi () and Giovanni Ursino
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Piero Tedeschi: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore

No def025, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: We study a game in which two competing sellers supplying experience goods of different quality can induce a perspective buyer into a bad purchase through (costly) deceptive advertising. We characterize the equilibrium set of the game and argue that an important class of these outcomes features pooling behavior at the pricing stage while requiring low quality sellers to air false claims about their product. These claims deceive the buyer and induce a bad purchase with positive probability. Although the low-quality product is purchased with positive probability in these equilibria, the buyer's (expected) utility can be higher than in a fully separating equilibrium. This result suggests that, surprisingly, deceptive practices may actually enhance competition. Finally, we characterize the optimal deterrence by a regulatory agency that seeks to punish deceptive practices. We show that consumer surplus maximization requires lower deterrence than social welfare maximization. The analysis is robust to various extensions.

Keywords: Asymmetric Information; Bayesian Consumers; Deception; Misleading Advertising; Signaling (search for similar items in EconPapers)
JEL-codes: L13 L15 L4 (search for similar items in EconPapers)
Pages: 47
Date: 2015-06
New Economics Papers: this item is included in nep-com, nep-hpe, nep-mic, nep-mkt and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://dipartimenti.unicatt.it/economia-finanza-def025.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Deceptive Advertising with Rational Buyers (2018)
Working Paper: Deceptive Advertising with Rational Buyers (2013)
Working Paper: Deceptive advertising with rational buyers (2012)
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