Exposing false advertising

Countries rely on different public and private agents to enforce consumer protection and fair competition regulations. To analyze the repercussions of different regimes on social welfare, we consider the possibility of false advertising by a firm in an environment with duopolistic competition and with consumers who can be rational or naïve regarding the trustworthiness of advertising claims. We compare the incentives for and outcomes of false advertisement verification and injunction requests made by one of three parties: a government agency with a broad focus maximizing (ex post) total welfare and two narrowly focused parties, the first a public or private party focused on consumer welfare net of its own enforcement costs and the second a competitor interested exclusively in its own profits. Considering ex ante welfare, we find that having a narrowly focused party as the plaintiff can be optimal due to government agency commitment problems. The optimal regime depends on both the share of the population's naïve consumers and the level of enforcement costs.