Misleading Advertising and Minimum Quality Standards

This paper examines the relationship between misinformation about product quality and quality standards, such as minimum quality standards and certi cation criteria, when products are vertically di erentiated in their health/safety aspects. We investigate the welfare e ect of regulating misinformation and strengthening MQSs. We nd that when the amount of misinformation on both low- and high-quality products is small, regulating misinformation on low-quality products reduces welfare, although the strictness of an MQS influences its e ect. On the other hand, regulating misinformation on high-quality products always improves welfare. We also nd that a stricter MQS can harm welfare. This, in particular, is likely to occur when the di erence between the perceived quality of the two types of products is large and when rms generate high degrees of misperceptions. Moreover, we extend the analysis by endogenizing quality investments and demonstrate that regulating misinformation on high-quality products may deteriorate their true quality and, thus, reduce welfare.