Paul Rubin, Apr 24, 2008
A version of this article was originally prepared for the Encyclopedia of Law and Economics (Edward Elgar, 2nd ed. 2008/2009). Deception is the manipulation of information to gain some advantage. This paper considers commercial deception through advertising. The paper first discusses the economics of information. The literature has derived four major policy conclusions. First, truthful information regarding price should not be restricted by regulatory authorities. Second, deception is most likely and most harmful for credence goods, and regulation is most useful (if it is useful at all) for these goods. Third, truthful information should never be restricted. Fourth, regulation of advertising is best done by authorities that specialize in advertising, rather than by agencies with another mission. A fifth, more tentative, conclusion is that regulation should limit itself to statements that are actually false, and ignore those that are misleading or deceptive. The paper begins with a discussion of the First Amendment issues in regulating advertising. It then considers advertising of prices and regulation and types of goods. The next secion examines regulation of true information about characteristics of goods other than price, with special reference to the U.S. Food and Drug Administration. The paper also discusses measures of deception and policies of mandating disclosure of negative information and remedies.