Ursino, Giovanni and Piccolo, Salvatore and Tedeschi, Piero (2012): Deceptive advertising with rational buyers.
Download (536kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Deceptive advertising with rational buyers|
|Keywords:||Misleading advertising, Deception, Bayesian Consumers, Asymmetric Information|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance|
|Depositing User:||Giovanni Ursino|
|Date Deposited:||13. Nov 2012 03:20|
|Last Modified:||13. Feb 2013 09:07|
Anderson, S. P., and R. Renault (2006): “Advertising Content,” American Economic Review, 96(1), 93–113.
Anderson, S. P., and R. Renault (2009): “Comparative advertising: disclosing horizontal match information,” The RAND Journal of Economics, 40(3), 558–581.
Bagwell, K. (2007): “The Economic Analysis of Advertising,” in Handbook of Industrial Organization, ed. by M. Armstrong, and R. Porter, vol. 3 of Handbook of Industrial Organization, chap. 28, pp. 1701 – 1844. Elsevier.
Bagwell, K., and G. Ramey (1988): “Advertising and Limit Pricing,” The RAND Journal of Economics, 19(1), 59–71.
Bagwell, K., and G. Ramey (1991): “Oligopoly Limit Pricing,” The RAND Journal of Economics, 22(2), 155–172.
Bagwell, K., and M. H. Riordan (1991): “High and Declining Prices Signal Product Quality,” American Economic Review, 81(1), 224–239.
Banerjee, B., and S. Bandyopadhyay (2003): “Advertising Competition Under Consumer Inertia,” Management Science, 22(1), 131144.
Banks, J. S., and J. Sobel (1987): “Equilibrium Selection in Signaling Games,” Econometrica, 55(3), 647–661.
Barigozzi, F., P. G. Garella, and M. Peitz (2009): “With a Little Help from My Enemy: Comparative Advertising as a Signal of Quality,” Journal of Economics & Management Strategy, 18(4), 1071–1094.
Becker, G. S. (1968): “Crime and Punishment: An Economic Approach,” Journal of Political Economy, 76(2), Crime and Punishment: An Economic Approach.
Becker, G. S., and K. M. Murphy (1993): “A Simple Theory of Advertising as a Good or Bad,” Quarterly Journal of Economics, 108(4), 941–964.
Cabral, L. M. B. (2000): “Stretching firm and brand reputation,” The RAND Journal of Economics, 31(4), 658673.
Chamberlin, E. H. (1933): The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value, vol. 38 of Harvard Economic Studies. Harvard University Press.
Cho, I.-K., and D. M. Kreps (1987): “Signaling Games and Stable Equilibria,” Quarterly Journal of Economics, 102(2), 179–221.
Chu, W. (1992): “Demand Signalling and Screening in Channels of Distribution,” Marketing Science, 11(4), 327–347.
Dixit, A., and V. Norman (1978): “Advertising and Welfare,” The Bell Journal of Economics, 9(1), 1–17.
Galeotti, A., and J. L. Moraga-Gonzalez (2008): “Segmentation, advertising and prices,” International Journal of Industrial Organization, 26(5), 1106-1119.
Grossman, G. M., and C. Shapiro (1984): “Informative Advertising with Differentiated Products,” Review of Economic Studies, 51(1), 63–81.
Hastak, M., and M. B. Mazis (2011): “Deception by Implication: A Typology of Truthful but Misleading Advertising and Labeling Claims,” Journal of Public Policy & Marketing, 30(2), 157–167.
Hattori, K., and K. Higashida (2012): “Misleading Advertising in Duopoly,” Canadian Journal of Economics, 45(3), 1154–1187.
Heidhues, P., B. Koszegi, and T. Murooka (2012): “The Market for deceptive Products,” .
Johnson, J. P., and D. P. Myatt (2006): “On the Simple Economics of Advertising, Marketing, and Product Design,” American Economic Review, 96(3), 756–784.
Leland, H. E. (1979): “Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards,” Journal of Political Economy, 87(6), 1328–1346.
Lewis, T. R., and D. E. M. Sappington (1994): “Supplying Information to Facilitate Price Discrimination,” International Economic Review, 35(2), 309–327.
Martimort, D., and H. Moreira (2010): “Common agency and public good provision under asymmetric information,” Theoretical Economics, 5(2), 159–213.
Mas-Colell, A., M. D. Whinston, and J. R. Green (1995): Microeconomic Theory. Oxford University Press.
Miklos-Thal, J., and J. Zhang (2013): “(De)marketing to Savvy Consumers,” Journal of Marketing Research, forthcoming.
Orzach, R., P. B. Overgaard, and Y. Tauman (2002): “Modest Advertising Signals Strength,” The RAND Journal of Economics, 33(2), 340–358.
Sauer, R. D., and K. B. Leffler (1990): “Did the Federal Trade Commission’s Advertising Substantiation Program Promote More Credible Advertising?,” American Economic Review, 80(1), 191–203.
Wang, C. (2011): “Informative Advertising, Consumer Search and Transparency Policy,” .
Wernerfelt, B. (1988): “Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond,” The RAND Journal of Economics, 19(3), 458–466.
Wernerfelt, B. (1994): “Selling Formats for Search Goods,” Marketing Science, 13(3), 298–309.