Competing with fad products: erroneous health beliefs and market outcomes

Abstract

We study how erroneous nutrition assumptions affect manufacturers’ profits and consumer surplus and how the government could intervene to improve welfare. In our model, two manufacturers produce a conventional product and a fad version misperceived to bring health benefits. We compare the laissez-faire outcome to two outcomes: one without false beliefs and the other with information provision reducing the false belief’s prevalence. We find that false beliefs about the health benefits of fad products lower consumer surplus and total welfare under some conditions. Information provision generally increases total welfare, but, in some situations, this occurs at the expense of consumer surplus.