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Deception and Competition in Search Markets

Tobias Gamp and Daniel Kraehmer

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study the interplay between deception and consumer search in a search market where firms may deceive some naive consumers with inferior products that display hidden (bad) attributes. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, superior goods are entirely driven out of the market. Deception harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.

Keywords: Deceptive product; Inferior product; Naivete; Consumer Search (search for similar items in EconPapers)
JEL-codes: D18 D21 D43 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
Date: 2018-05
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_014_2018

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