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Deception and Competition in Search Markets

Author

Listed:
  • Tobias Gamp
  • Daniel Kraehmer

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.

Suggested Citation

  • Tobias Gamp & Daniel Kraehmer, 2018. "Deception and Competition in Search Markets," CRC TR 224 Discussion Paper Series crctr224_2018_014, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2018_014
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    File URL: https://www.crctr224.de/en/research-output/discussion-papers/discussion-papers#DP14
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    More about this item

    Keywords

    Deceptive product; Inferior product; Naivete; Consumer Search;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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