Deceptive Advertising with Rational Buyers

Giovanni Ursino, Salvatore Piccolo () and Piero Tedeschi ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through (costly) deceptive advertising. We characterize a class of pooling equilibria where sellers post the same price regardless of their quality and low quality ones deceive buyers. Although in these equilibria low quality goods are purchased with positive probability, the buyer’s (expected) utility can surprisingly be higher than in a fully separating equilibrium, which suggests that (absent price regulation) a per se rule banning deceptive practices may harm consumers. We also argue that sellers invest more in deceptive advertising the better their reputation vis-à-vis potential clients – i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. We show that consumer surplus maximization requires a higher monitoring e¤ort than social welfare maximization.

Keywords: Misleading Advertising; Deception; Bayesian Consumers; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: L13 L15 L4 (search for similar items in EconPapers)
Date: 2013-12-10
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Forthcoming in Management Science

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http://www.csef.it/WP/wp348.pdf (application/pdf)

Related works:
Journal Article: Deceptive Advertising with Rational Buyers (2018)
Working Paper: Deceptive Advertising with Rational Buyers (2015)
Working Paper: Deceptive advertising with rational buyers (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:348

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