Misleading Advertising and Customer Recognition

ABSTRACT In a two‐period model of behaviour‐based price discrimination, we consider the strategic incentives of competing oligopolistic firms in creating false expectations about the horizontal attributes of the products. In the case of exogenous real locations, we show that misleading advertising is profitable for firms as long as the equilibrium advertised product differentiation is greater than the real one. We also show that when firms adopt misleading advertising, behaviour‐based price discrimination might increase the profits with respect to uniform pricing. When the real locations are endogenously chosen by firms, misleading advertising yields lower real product differentiation in equilibrium, but, due to the increase of the expected product differentiation, the final impact on the equilibrium profits is always positive. We also illustrate the implications of misleading advertising for consumer surplus and welfare, and we outline some policy prescriptions.