The Effects of Consumer Protection on Sales Signs, Consumer Search and Competition

Within a one-shot, duopoly game, we show that firms cannot use false in-store price comparisons to deter rational consumers from further beneficial price search in an effort to create market power. However, by introducing a consumer protection authority that monitors price comparisons, we formalise Nelson's (1974) conjecture by showing that 'middle-order' monitoring can actually facilitate the deception of fully rational consumers, to deter them from otherwise optimal search. Despite this effect, we show that no increase in monitoring can ever harm consumers thanks to a second, larger effect that improves consumer information and increases the intensity of price competition.