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Inducing Information Provision through Competition Policy: Prohibitions on False and Unsubstantiated Claims

By Kenneth S. Corts


Competition law in many countries prohibits firms from making false claims about product quality or performance to potential buyers and also requires that the truth of specific claims be supported by adequate prior testing. This paper explores the differences between these two policies and asks, among other questions, whether a policy of mandatory prior substantiation has any incremental effect if a ban on false claims is in place. This paper develops a model in which firms have private information about their probability of having a high quality product and are able to determine product quality with certainty through costly learning. Penalties for false claims and for unsubstantiated claims create an opportunity for firms to credibly reveal their information and for signaling to emerge in equilibrium. I show that the two kinds of penalties affect the possibility of signaling in different ways, and that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone. It is therefore not redundant to a false claims ban, but is a useful additional policy tool in markets characterized by asymmetric information

Year: 2009
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