Inferior Products and Profitable Deception
By Paul Heidhues, B. Kőszegi, Takeshi Murooka. 2017
138 citations recorded by the source corpus.
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.
Subfields: Finance, Management Science and Operations Research, Safety Research
View Paper: https://www.semanticscholar.org/paper/a2221a94961facb09437b4642c5fa8b46a45df82
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Finance
In Management Science and Operations Research
In Safety Research
Citations in the corpus
- Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment (2016, result): “Second, our experimental findings are also relevant to the growing literature on firm and consumer interactions in markets with shrouded attributes (Gabaix and Laibson, 2006; Veiga and Weyl, 2016; Heidhues et al., 2017).”