Cheating as a dynamic marketing strategy in monopoly, cartel and duopoly

Abstract

In 2015 it was discovered that Volkswagen had manipulated the exhaust emissions of its (diesel) cars. Since then, numerous other automotive car manufacturers were strongly suspected to violate against the same emission standards. This paper investigates how and why firms (monopoly, cartel and duopoly) engage in cheating, more precisely, promising attributes that are actually not part of the product. Firms make claims in order to better market their product but risk damaging their future reputation. The upshot of the paper is the stark difference between open loop and Markov perfect oligopolistic equilibrium outcomes. More precisely, the latter mitigates cheating substantially even below the levels attained by monopolies and cartels (unless consumers have a very short memory), which is contrary to the outcome in the limiting static version of the game. Therefore, revealing the true state (e.g., by mandating strict inspections) could force firms to use this information and play in Markov instead of open loop strategies.