Author: Frances Xu Lee, 2022.

Using a positive term in labeling a product may mislead buyers into expecting the product to have a higher quality than the true quality. However, given the limitation that the labeling language has to be simple, completely eliminating inflation of the buyers’ beliefs by a positive term will also eliminate information transmission of the product quality. Information transmission is needed to motivate the seller to invest in the quality in the first place. A “reasonable consumer” standard that holds any labeling that has misled a reasonable consumer liable results in too little use of the positive term and too little effort in providing the quality valuable to the buyers.