Strategic Mis-Selling and Pre-Purchase Deliberation
41 Pages Posted: 19 Aug 2012 Last revised: 5 Sep 2015
Date Written: September 2015
This paper examines the interaction between an informed seller and an uninformed buyer, facing the possibly inappropriate status quo product. The buyer can invest cognitive resources before the purchasing decision. In the one-shot interaction, it is impossible for the seller to always sell the appropriate product. If the extent of mis-selling (the probability that the status quo product is not appropriate) is low, the seller announces that nothing of the status quo product will go wrong. Otherwise, he randomizes between truth-telling and mis-selling when the status quo product is not appropriate. The transaction cost of the buyer's pre-purchase deliberation increases with the extent of mis-selling as the extent of mis-selling is small and decreases thereafter. Finally, reputation with a "tip" mechanism or competition between sellers may restore the efficient outcome where this transaction cost vanishes.
Keywords: Mis-selling, consumer deliberation, unforeseen contingencies, asymmetric information
JEL Classification: D82, D83, D86, L14, L15
Suggested Citation: Suggested Citation