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Misleading Labeling and Product Quality


Mar 09, 2022

Using a positive term in labeling a product may mislead buyers into expecting the product to have a higher quality than the true quality. However, given the limitation that the labeling language has to be simple, completely eliminating inflation of the buyers’ beliefs by a positive term will also eliminate information transmission of the product quality. Information transmission is needed to motivate the seller to invest in the quality in the first place. A “reasonable consumer” standard that holds any labeling that has misled a reasonable consumer liable results in too little use of the positive term and too little effort in providing the quality valuable to the buyers. More market-beneficial labeling behaviors can be encouraged by a legal or regulatory policy that also dismisses cases where buyers are only moderately misled so as to preserve the seller’s incentive to label with the positive term even when the quality is not perfect

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