Beneficial consumer fraud

Resum

This paper discusses the role of prices as signals in a static two-sided asymmetric information monopolistic model. We demonstrate the existence of equilibria involving fraud even if consumers’ private information about quality is made arbitrarily precise. Our main result is that higher levels of fraud attempted by low-quality sellers may be beneficial to prospective buyers via a decrease in the market partial-pooling price. Furthermore, more precise private information may harm consumers. These findings suggest that standard consumer policies based on the provision of accurate information and the promotion of honesty in the market place may reduce consumers’ welfare