Deceptive advertising with rational buyers

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

MPRA Paper from University Library of Munich, Germany

Abstract: We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through their (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 (expected) utility can be higher than in a fully separating equilibrium. It is also argued that low quality sellers invest more in deceptive advertising the better is their reputation vis-à-vis potential clients — i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising when they produce a low quality product. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. When the objective of this agency is to maximize consumer surplus, its monitoring effort is larger than under social welfare maximization.

Keywords: Misleading advertising; Deception; Bayesian Consumers; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: L1 (search for similar items in EconPapers)
Date: 2012-11-08
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-mkt and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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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 (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42553

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