Template-Type: ReDIF-Paper 1.0
Author-Name: Salvatore Piccolo
Author-X-Name-First: Salvatore 
Author-X-Name-Last: Piccolo
Author-Email: salvatore.piccolo@unicatt.it
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore
Author-Name: Piero Tedeschi
Author-X-Name-First: Piero 
Author-X-Name-Last:  Tedeschi
Author-Email: piero.tedeschi@unicatt.it
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore
Author-Name: Giovanni Ursino
Author-X-Name-First: Giovanni 
Author-X-Name-Last: Ursino
Author-Email: giovanni.ursino@unicatt.it
Author-Workplace-Name: Università Cattolica del Sacro Cuore
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore



Title: Deceptive Advertising with Rational Buyers
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.
Length: 47
Creation-Date: 2015-06
File-URL: http://dipartimenti.unicatt.it/economia-finanza-def025.pdf
File-Format: Application/pdf
File-Function: First version, 2015
Number: def025
Classification-JEL: L13, L15, L4. 
Keywords: Asymmetric Information, Bayesian Consumers, Deception, Misleading Advertising,
Signaling
Handle: RePEc:ctc:serie1:def025