Deceptive advertising in a crowdfunding market

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.