Investigation of product quality and advertising: Government intervention in advertising

Abstract

We investigate the joint operations and marketing decisions of a manufacturer under government intervention in advertising. We introduce four possible intervention scenarios: no government intervention, proactive intervention to maximize social welfare, proactive intervention to protect consumer rights, and reactive intervention by imposing penalties. We obtain the firm's best joint decision on product quality and advertising in response to the government's intervention. The investigation results reveal that there is no one-size-fits-all strategy. The goal of consumer protection can damage the total welfare of society, while the pursuit of social welfare harms consumer rights. The government needs to carefully consider not only the characteristics of products and consumer markets to determine how it intervenes but also the effect of its policies on overall performance. It is recommended to control misleading advertising by imposing penalties reactively. By imposing penalties differently, consumer rights can be protected, while enhancing the total welfare of society. The investigation results also have important implications for business managers. There is a best mix of operations and marketing decisions that properly responds to each government policy and achieves the best profit performance.