Competition and Product Misrepresentation
28 Pages Posted: 10 Oct 2017
Date Written: September 30, 2017
This paper examines the effect of competition on product quality when product quality is unobserved before purchase. Using a dataset that records the actual broadband internet speed consumers receive as well as the speed the provider claims is being delivered, I find that an additional broadband competitor raises the ratio of actual to claimed speeds for incumbents by between 23 and 32% within the first 6 months, but that this effect attenuates after 18 months. This increase is due to improvements in the actual speed, and not just reductions in the claimed speed. I recover the causal effect of competition on product misrepresentation by leveraging the launch of a broadband-capable satellite in mid-2012 and exploiting exogenous variation in suitability for satellite internet across U.S. counties. I provide suggestive evidence that the reduction in firms’ strategic misrepresentation of their products led to reduced misallocation of consumers across internet plans.
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