Demand for 'Healthy' Products: False Claims and FTC Regulation

Abstract

Firms sometimes make selective or deceptive claims. Such claims can have negative consequences for consumers, especially if consumers are not fully informed and the claims are hard to verify. This paper aims to measure the decline in demand that a firm making such claims faces when caught. In addition, it seeks to understand which type of consumer these claims primarily affect. Using a panel dataset of consumer purchases and firm advertising, we exploit the fact that four popular products settled charges raised by the Federal Trade Commission, to measure this impact. We further control for and document firm responses in terms of price and advertisement changes around the date of the settlement. Our findings indicate a significant decline in demand following the termination of the claims, resulting in a 12%-67% monthly loss in revenue across the four products, which amounts to a $0.40m-$3.82m loss in monthly revenue. We further find these claims primarily affect consumers who are newcomers.