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Business Articles Awards > Economics

Deceptive Marketing Practices: How Some Consumers Benefit When Others are Deceived

Sean Durkin, Economics Committee Newsletter, Volume 14, Number 1, Spring 2015

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This article discusses why deceptive promotional practices may not harm competition even if it cannot be countered by rivals and a large share of buyers is deceived. By deceptive promotional practices, I mean practices that impact the willingness to pay for a company’s product relative to its rivals’ products. Thus, deceptive promotional practices could be a company making false statements about the quality of its own products and/or the quality of its rivals’ products. For example, the FTC alleged that Intel manipulated the performance benchmarks which deceived consumers and gave an incorrect impression of the performance of Intel processors relative to AMD processors. This article shows that promotion of a seller’s product, whether deceptive or truthful, can increase competition between sellers by inducing them to more aggressively compete for buyers who would otherwise view the two products as close substitutes. While deception reduces the sales of the deceiving firm’s rivals and harms buyers who are deceived, buyers who are not deceived can be better off because deception leads to lower prices for them. The basic intuition is that, when sellers cannot price discriminate, they may not compete aggressively for buyers who view their products as close substitutes for their rivals’ product because it would require them to lower prices to loyal buyers with more inelastic demand. Advertising and promotion is often targeted at buyers who view rivals’ products as close substitutes. When promotion raises the willingness-to-pay for a seller’s products, it can induce sellers to compete more aggressively for those buyers. This implies that the assertion that deceptive practices have no procompetitive justification is incorrect. Buyers that are not affected by the promotion benefit because it increases competition for those affected by the promotion. When the promotion is deceptive, deceived buyers are harmed because they are deceived and not due to any harm to competition caused by the deception. In addition, this article sheds light on claims often made by classes of plaintiffs under state consumer protection statutes that deceptive practices lead to higher prices for all consumers. The economic logic behind these claims is that deception, even of a limited number of consumers, artificially raises the demand for the defendant’s product, causing all consumers to pay higher prices. The analysis in this paper shows that artificially raising the demand for some buyers need not lead to higher prices for all consumers. In fact, deceiving some customers can cause prices to be lower for consumers who were not deceived. This has implications for both class certification and damages issues in these cases.

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