When (not) to indulge in ‘puffery’: the role of consumer expectations and brand goodwill in determining advertised and actual product quality

We analyze why some firms advertise product quality at a level different from the actual quality of a product. By considering the interacting effects of product quality and advertising, we develop a dynamic model of consumer expectations about product quality and the development of brand goodwill to determine the optimal values for the decision variables. The model parameters are determined based on prior literature and we use numerical techniques to arrive at the solution. We then derive conditions under which a firm will find it optimal to overstate or understate product quality. The results suggest that quality may be overstated in markets characterized by high price sensitivity, low quality sensitivity, low brand loyalty, and high source credibility, suggesting the need for vigilance on the part of consumers, upper level managers and regulatory authorities in such market conditions. This is important because current regulatory resources are insufficient to reduce deceptive advertising practices (Davis JJ. 1994. Ethics in advertising decision‐making: implications for reducing the incidence of deceptive advertising. Journal of Consumer Affairs 28 : 380–402). Further, the law of deceptive advertising prohibits some advertising claims on the ground that they are likely to harm consumers or competitors (Preston IL, Richards JI. 1993. A role for consumer belief in FTC and Lanham Act deceptive advertising cases. American Business Law Journal 31 : 1–29). Also, Nagler (1993. Rather bait than switch: deceptive advertising with bounded consumer rationality. Journal of Public Economics 51 : 359–378) shows that deceptive advertising causes a net social welfare loss and a public policy effectively preventing deception will improve social welfare. Copyright © 2000 John Wiley & Sons, Ltd.