IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/9201.html
   My bibliography  Save this paper

Vague Lies: How to Advise Consumers When They Complain

Author

Listed:
  • Drugov, Mikhail
  • Troya Martinez, Marta

Abstract

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.

Suggested Citation

  • Drugov, Mikhail & Troya Martinez, Marta, 2012. "Vague Lies: How to Advise Consumers When They Complain," CEPR Discussion Papers 9201, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9201
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9201
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    2. Navin Kartik, 2009. "Strategic Communication with Lying Costs," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1359-1395.
    3. Henrik Lando, 2002. "When is the Preponderance of the Evidence Standard Optimal?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 27(4), pages 602-608, October.
    4. Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 773-789.
    5. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 505-540.
    6. 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 309-327, May.
    7. Mark Armstrong, 2008. "Interactions between Competition and Consumer Policy," CPI Journal, Competition Policy International, vol. 4.
    8. Simon P. Anderson & Régis Renault, 2009. "Comparative advertising: disclosing horizontal match information," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 558-581.
    9. Alexander Shapiro & Jos Berge, 2002. "Statistical inference of minimum rank factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 67(1), pages 79-94, March.
    10. Justin P. Johnson & David P. Myatt, 2006. "On the Simple Economics of Advertising, Marketing, and Product Design," American Economic Review, American Economic Association, pages 756-784.
    11. Maxim Ivanov, 2013. "Information revelation in competitive markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 337-365, January.
    12. repec:dau:papers:123456789/12478 is not listed on IDEAS
    13. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
    14. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Troya-Martinez, Marta, 2016. "Vagueness and information-sharing," Games and Economic Behavior, Elsevier, vol. 100(C), pages 301-320.

    More about this item

    Keywords

    advice; consumer protection; legal procedure; persuasion;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9201. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.