Expanding the Informativeness of the Price System with Law

Marcel Boyer and Jean-Jacques Laffont

Canadian Journal of Economics, 1989, vol. 22, issue 2, 217-27

Abstract: The use of false regular prices is a major case of misleading advertisement in what seems to be quite competitive markets. The authors construct a competitive model with rational expectations in which such misleading advertising emerges. They assume that there is competition locally, but that different qualities can exist on different markets. The quality-revealing process is noisy: some high quality firms experience problems and announce a bargain sale. There is a legal penalty, K, to be paid if someone is convicted of misrepresenting the quality of its product. As K increases, the price system becomes "more" informative by increasing the credibility and average quality associated with the signal "bargain sale."

Date: 1989
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Working Paper: Expanding the Informativeness of the Price System with Law (1985)
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