The effects of loss aversion on deceptive advertising policies

We extend the deceptive advertising model of Piccolo et al. (RAND J Econ 46(3):611–624, 2015) to a framework in which consumers may be loss averse. There are two sellers, competing on prices and offering experience goods with some differences in quality. Prospective customers may be harmed by deceptive advertising: a marketing practice that can induce them to make bad purchases. We show that although deceptive advertising occurs depending on the degree of consumers’ loss aversion, this behavioral bias does not reflect on firms’ prices. Nevertheless, the presence of loss-averse consumers crucially changes the optimal deterrence rule that a Public Authority should adopt against false claims and misleading advertising. Unlike Piccolo et al. (2015), in this more general model, strong enforcements may improve the buyer welfare according to the degree of loss aversion.