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Who Benefits from Misleading Advertising?

  • Keisuke Hattori

    ()

    (Faculty of Economics, Osaka University of Economics)

  • Keisaku Higashida

    ()

    (School of Economics, Kwansei Gakuin University)

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.

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File URL: http://192.218.163.163/RePEc/pdf/kgdp85.pdf
File Function: First version, 2012
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Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 85.

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Length: 40 pages
Date of creation: Mar 2012
Date of revision: Mar 2012
Handle: RePEc:kgu:wpaper:85
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  1. Hattori, Keisuke & Higashida, Keisaku, 2014. "Misleading advertising and minimum quality standards," Information Economics and Policy, Elsevier, vol. 28(C), pages 1-14.
  2. Hans Haller & Subhadip Chakrabarti, 2002. "An Analysis of Advertising Wars," CIE Discussion Papers 2002-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  4. Keisuke Hattori & Keisaku Higashida, 2011. "Misleading Advertising in Duopoly," Discussion Paper Series 69, School of Economics, Kwansei Gakuin University, revised Mar 2011.
  5. Edward L. Glaeser & Gergely Ujhelyi, 2006. "Regulating Misinformation," NBER Working Papers 12784, National Bureau of Economic Research, Inc.
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