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Inferior products and profitable deception
Title / Series / Name
Publication Volume
Publication Issue
Pages
Editors
Keywords
Credit cards
Deceptive product
Inferior product
Mutual funds
Naivete
Profitable deception
Economics and Econometrics
Deceptive product
Inferior product
Mutual funds
Naivete
Profitable deception
Economics and Econometrics
URI
https://hdl.handle.net/20.500.14018/27348
Abstract
We analyse conditions facilitating profitable deception in a simple model of a competitive retail market. Firms selling homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless revealed to them by a firm, where we assume that there is a binding floor on the anticipated prices. Our main results establish that "bad" products (those with lower social surplus than an alternative) tend to be more reliably profitable than "good" products. Specifically, (1) in a market with a single socially valuable product and sufficiently many firms, a deceptive equilibrium-in which firms hide additional prices-does not exist and firms make zero profits. But perversely, (2) if the product is socially wasteful, then a profitable deceptive equilibrium always exists. Furthermore, (3) in a market with multiple products, since a superior product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison, it guarantees that firms can profitably sell the inferior product by deceiving consumers. We apply our framework to the mutual fund and credit card markets, arguing that it explains a number of empirical findings regarding these industries.
Topic
Publisher
Place of Publication
Type
Journal article
Date
2017-01
Language
ISBN
Identifiers
10.1093/restud/rdw037