Volume 51, Issue 2 p. 375-401
Original Article

Dynamic competition in deceptive markets

Johannes Johnen

Corresponding Author

Johannes Johnen

CORE/LIDAM, Université catholique de Louvain, Voie du Roman Pays 34, Louvain-la-Neuve, 1348 Belgium

johannes.johnen@uclouvain.be

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First published: 01 June 2020
Citations: 13

I thank David Myatt, three anonymous referees, Alexei Alexandrov, Özlem Bedre-Defolie, Helmut Bester, Yves Breitmoser, Ulrich Doraszelski, Michael D. Grubb, Paul Heidhues, Johannes Hörner, Steffen Huck, Rajshri Jayaraman, Botond Kőszegi, Dorothea Kübler, Takeshi Murooka, Volker Nocke, Martin Peitz, David Ronayne, Marc Rysman, Heiner Schumacher, Benjamin Solow, Rani Spiegler, Konrad Stahl, Roland Strausz, Georg Weizsäcker, participants at the 2015 MaCCI Workshop on Behavioral IO in Bad Homburg, and seminar and conference audiences. I thank the FW-B for funding the Action de recherche concertée grant n°19/24-101 “PROSEco”, and the FNRS and FWO for the EOS project 30544469 “IWABE”.

Abstract

In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less-profitable sophisticated consumers. I study such markets when firms compete repeatedly. By observing their customers' usage patterns, firms acquire private information about their level of naiveté. First, I find that private information on naiveté mitigates competition and is of great value even with homogeneous products. Second, competition between initially symmetrically informed firms is mitigated when firms can educate naifs about mistakes. In an analogous setting without naifs, the second result does not occur; the first result occurs when firms cannot disclose fees.

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