Download This PaperFalse Advertising
38 Pages Posted: 16 Jan 2016 Last revised: 23 Jul 2016
Date Written: July 18, 2016
Abstract
There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature.
Keywords: Misleading Advertising, Product Quality, Pass-through, Self-Regulation
JEL Classification: M37, L15, D83
Suggested Citation: Suggested Citation