Consumer sophistication, word-of-mouth and “False” promotions

We find that the possibility of offering false promotions can improve the payoffs for both firms, especially when the market is more competitive. Moreover, even when consumers can identify that a firm is offering a false promotion and pass this information to others, a firm still finds it optimal to offer such promotions from time to time. In general, the firm is more likely to offer false promotions in an environment with lower competition, fewer sophisticated consumers, and weaker WOM.