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Deceptive advertising with rational buyers

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  • Ursino, Giovanni
  • Piccolo, Salvatore
  • Tedeschi, Piero

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42553.

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Date of creation: 08 Nov 2012
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Handle: RePEc:pra:mprapa:42553

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Keywords: Misleading advertising; Deception; Bayesian Consumers; Asymmetric Information;

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  13. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
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  15. Wang, Chengsi, 2011. "Informative Advertising, Consumer Search and Transparency Policy," MPRA Paper 34977, University Library of Munich, Germany.
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