RHODES, A. and WILSON, C.M., 2017. False advertising. The RAND Journal of Economics, 49(2), pp. 348-369.
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.
This paper is closed access 02/05/2020.
Rhodes acknowledges financial support from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement No 670494).