This chapter examines the legal rules that the FTC has evolved to judge advertising. The FTC has set the wrong objective for these rules in that the agency has tried to increase the reliability of all advertising, both the kind that consumers use as a complement or guide to their own product search activities and the kind that consumers use as a substitute for their own search. Instead, the agency should police only the reliability of the “search substitute” kind of advertising. This is the approach of the common law of fraud. FTC advertising rules based on this approach would be more enforceable for the agency, more predictable to advertisers, and more beneficial to consumers.

Section I summarizes the relevant economic principles. Section II describes the common-law approach in terms of these principles. Section III describes current FTC advertising doctrines, analyzes their consumer welfare consequences relative to the common-law approach, and proposes two alternative kinds of regulatory reform.

The economics of deceptive advertising

The theory of advertising

The main economic justification for advertising is that it reduces consumer search costs and makes consumer search more effective. Consumers constantly expend resources to find the goods and services that best serve their wants. Any device that reduces these search costs produces benefits. Aside from the direct benefit of the time and other resources that consumers save, consumers receive two other benefits from advertising.