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Vague Lies: How to Advise Consumers When They Complain

  • Drugov, Mikhail
  • Troya Martinez, Marta

This paper analyzes the incentives of a seller to provide (un)biased and (im)precise advice about a complex product such as insurance, banking and telecommunication services. Misleading the buyers by biasing the advice upwards increases the revenues but also the expected fine imposed by the authority. Making the advice less precise does not affect the revenues in equilibrium but interferes with the authority's inference and affects the expected fine in a non-monotonic way. In particular, making the advice less precise makes it harder to convict the seller but increases the expected fine when the seller is found guilty. We find that, in the equilibrium, biasing the advice and making it noisier are complements; in particular, a higher buyers' heterogeneity, a stricter standard of proof employed by the authority and a larger share of credulous consumers make the advice more biased and less precise.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9201.

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Date of creation: Oct 2012
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Handle: RePEc:cpr:ceprdp:9201
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  1. David P. Myatt & Justin P. Johnson, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
  2. Judd, Kenneth L & Riordan, Michael H, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 773-89, October.
  3. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  4. Armstrong, Mark, 2008. "Interactions between competition and consumer policy," MPRA Paper 7258, University Library of Munich, Germany.
  5. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers.
  6. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  7. Navin Kartik, 2008. "Strategic Communication with Lying Costs," 2008 Meeting Papers 350, Society for Economic Dynamics.
  8. Simon P. ANDERSON & Régis RENAULT, 2008. "Comparative Advertising: disclosing horizontal match information," THEMA Working Papers 2008-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  10. Alexander Shapiro & Jos Berge, 2002. "Statistical inference of minimum rank factor analysis," Psychometrika, Springer, vol. 67(1), pages 79-94, March.
  11. Miceli, Thomas J, 1990. "Optimal Prosecution of Defendants Whose Guilt Is Uncertain," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 189-201, Spring.
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