Deceptive advertising in a crowdfunding market

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Deceptive advertising in a crowdfunding market

Zhang, Juan / Huang, Jian

Highlights • Prices play a supporting role in signaling quality and enhances the signaling effect of advertising. • The regulation on deceptive advertising influences the informative effect of advertising. • The high-quality creator could have a higher success rate when its quality is unknown to consumers. • The low-quality creator’s deceptive advertising could benefit the consumer surplus and social welfare.

Abstract Some creators in crowdfunding markets have recently employed deceptive advertising to overstate their product quality. We consider a model in which the policy maker would punish such false advertising when detecting it. Using a signaling framework, we examine how deceptive advertising influences rational buyers’ purchase decisions and how the creator signals its quality via advertising, as well as price. We show that the high-quality creator finds it optimal to use price and advertising jointly to deter low-quality creators’ mimicking behavior. Moreover, whether the deceptive advertising occurs in a crowdfunding market depends on the degree of the policy maker’s regulation. Counterintuitively, a stricter regulation on deceptive advertising might not always deter the low-quality creator from mimicking. Moreover, our results also indicate that allowing a moderate level of deceptive advertising might benefit consumers because the low-type creator’s deceptive claim might motivate the high-quality creator to cover more buyers.