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Deceptive Advertising with Rational Buyers

Author

Listed:
  • Salvatore Piccolo

    () (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

  • Piero Tedeschi

    () (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

  • Giovanni Ursino

    () (Università Cattolica del Sacro Cuore
    Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

Abstract

We study a game in which two competing sellers supplying experience goods of different quality can induce a perspective buyer into a bad purchase through (costly) deceptive advertising. We characterize the equilibrium set of the game and argue that an important class of these outcomes features pooling behavior at the pricing stage while requiring low quality sellers to air false claims about their product. These claims deceive the buyer and induce a bad purchase with positive probability. Although the low-quality product is purchased with positive probability in these equilibria, the buyer's (expected) utility can be higher than in a fully separating equilibrium. This result suggests that, surprisingly, deceptive practices may actually enhance competition. Finally, we characterize the optimal deterrence by a regulatory agency that seeks to punish deceptive practices. We show that consumer surplus maximization requires lower deterrence than social welfare maximization. The analysis is robust to various extensions.

Suggested Citation

  • Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2015. "Deceptive Advertising with Rational Buyers," DISCE - Working Papers del Dipartimento di Economia e Finanza def025, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  • Handle: RePEc:ctc:serie1:def025
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:revind:v:53:y:2018:i:4:d:10.1007_s11151-018-9669-1 is not listed on IDEAS
    2. Ursino, Giovanni & Piccolo, Salvatore & Tedeschi, Piero, 2012. "Deceptive advertising with rational buyers," MPRA Paper 42553, University Library of Munich, Germany.
    3. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2015. "How limiting deceptive practices harms consumers," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 611-624, September.
    4. Salvatore Piccolo & Aldo Pignataro, 2016. "Consumer Loss Aversion, Product Experimentation and Implicit Collusion," CSEF Working Papers 457, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    Asymmetric Information; Bayesian Consumers; Deception; Misleading Advertising; Signaling;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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