Is deception profitable?

In previous posts, we have talked about the use of testimonial advertising by fraudsters, and this raises the question of how widespread and profitable deception is. Some presidential candidates have blamed deception as a cause of the subprime lending crisis. Eugenio Miravete studies this, and finds some deception by long distance phone companies,

Imagine that you moved to Texas in the middle of the 1990s and wanted to sign up for a long distance telecommunication carrier. After fifteen minutes of answering questions about your personal details, the operator asks you which carrier you choose for long distance calls. You say “I do not care,” .... two months later, when you get your first bill, you realize that you are indeed subscribed to “I Do Not Care, Inc.” which by the way is charging astronomical rates for your long distance calls.

But consumers quickly learn about the deception and react appropriately.

...while consumers often fail to subscribe to the least expensive plan for their usage profile, these mistakes are not systematic, and subsequent plan switching is best explained as an explicit attempt to reduce monthly bills.

This leads Miravete to conclude that

Deceptive behavior is just one of many such quality characteristics – and given sufficient competition, consumers who are unhappy with this particular characteristic can choose to take their business elsewhere. So long as sufficient competition exists, there is no need to impose standards of behavior on firms or to provide step-by-step guidance to consumers in making their decisions: consumers can and will make sensible decisions for themselves.

Professor Miravete testified at the FTC's conference on behavioral economics which provides a nice summary of what we know about behavioral biases of consumers and how they should (or should not) affect policy. It also highlights the behavioral research that FTC staff economists do, leading to innovations like the prototype mortgage disclosure form.

Thanks to Joe Mulholland for the heads up.