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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.

Suggested Citation

  • Ursino, Giovanni & Piccolo, Salvatore & Tedeschi, Piero, 2012. "Deceptive advertising with rational buyers," MPRA Paper 42553, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42553
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    Cited by:

    1. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2018. "Deceptive Advertising with Rational Buyers," Management Science, INFORMS, vol. 64(3), pages 1291-1310, March.
    2. 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.
    3. Serafin Grundl & You Suk Kim, 2019. "Consumer mistakes and advertising: The case of mortgage refinancing," Quantitative Marketing and Economics (QME), Springer, vol. 17(2), pages 161-213, June.
    4. Hu, Shu & Fu, Ke & Wu, Tong, 2021. "The role of consumer behavior and power structures in coping with shoddy goods," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 155(C).
    5. Faqi Xie & Yushuang Deng & Huiru Chen, 2023. "Pricing and Quantity Decisions under Asymmetric Carbon Emission Reduction Information and Cap-and-Trade Mechanism," IJERPH, MDPI, vol. 20(3), pages 1-27, January.
    6. Piccolo, Salvatore & Pignataro, Aldo, 2018. "Consumer loss aversion, product experimentation and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 49-77.
    7. Zhang, Qiao & Tang, Wansheng & Zaccour, Georges & Zhang, Jianxiong, 2019. "Should a manufacturer give up pricing power in a vertical information-sharing channel?," European Journal of Operational Research, Elsevier, vol. 276(3), pages 910-928.
    8. Aldo Pignataro, 2019. "The effects of loss aversion on deceptive advertising policies," Theory and Decision, Springer, vol. 87(4), pages 451-472, November.
    9. Matthew Jones & Bruce Kobayashi & Jason O’Connor, 2018. "Economics at the FTC: Non-price Merger Effects and Deceptive Automobile Ads," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(4), pages 593-614, December.
    10. Kemal Kıvanç Aköz & Cemal Eren Arbatli & Levent Celik, 2020. "Manipulation Through Biased Product Reviews," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 591-639, December.
    11. Serafin J. Grundl & You Suk Kim, 2017. "Consumer Mistakes and Advertising : The Case of Mortgage Refinancing," Finance and Economics Discussion Series 2017-067, Board of Governors of the Federal Reserve System (U.S.).
    12. 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.
    13. Chen Jin & Luyi Yang & Kartik Hosanagar, 2019. "To Brush or Not to Brush: Product Rankings, Customer Search, and Fake Orders," Working Papers 19-02, NET Institute.

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    Keywords

    Misleading advertising; Deception; Bayesian Consumers; Asymmetric Information;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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