Deceptive Advertising with Rational Buyers

37 Pages Posted: 9 Nov 2012

See all articles by Giovanni Ursino

Giovanni Ursino

Università Cattolica del Sacro Cuore

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Piero Tedeschi

Università Cattolica; Catholic University of the Sacred Heart of Milan

Date Written: November 8, 2012

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.

Keywords: misleading advertising, deception, Bayesian consumers, asymmetric information

JEL Classification: L1

Suggested Citation

Ursino, Giovanni and Piccolo, Salvatore and Tedeschi, Piero, Deceptive Advertising with Rational Buyers (November 8, 2012). Available at SSRN: https://ssrn.com/abstract=2172714 or http://dx.doi.org/10.2139/ssrn.2172714

Giovanni Ursino

Università Cattolica del Sacro Cuore ( email )

Largo Gemelli, 1
Milan, MI 20123
Italy

Salvatore Piccolo (Contact Author)

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

Piero Tedeschi

Università Cattolica ( email )

United States
+390272342779 (Phone)
+390272342781 (Fax)

Catholic University of the Sacred Heart of Milan

Italy

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