Who Benefits from Misleading Advertising?

Keisuke Hattori and Keisaku Higashida

No 85, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: We develop a Hotelling model of horizontally and vertically differentiated brands with misleading advertising competition. We investigate the question of who benefits or loses from the misinformation created by advertising competition and related regulatory policies. We show that the quality gaps between two brands are crucial for determining the effect of misinformation on the firms’ profits, aggregate or individual consumer surplus, and national welfare. Although the misinformation tricks consumers into buying products that they would not have purchased otherwise, it may improve welfare even if the advertising does not expand the overall demand for the brands. We also show that, although endogenous advertising competition may lead to a prisoner’s dilemma for firms, it makes some consumers better off. We also consider the effects of several regulatory policies, such as advertising taxes, ad valorem and unit taxes on production, comprehensive and partial prohibitions of misleading advertising, government provisions of quality certification or counter-information, and the education of consumers.

Keywords: Misinformation; Advertising Competition; Regulation; Product Differentiation (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012-03, Revised 2012-03
New Economics Papers: this item is included in nep-com, nep-ind, nep-mkt and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Who Benefits from Misleading Advertising? (2015)
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