The “Reasonable Consumer” Standard for Product Labeling

Abstract The courts often cites a “reasonable consumer” in deciding cases where a positive term on the label is alleged to have misled the consumers. For cases where the labeling language has to be simple while the product quality can be nuanced, this paper examines a few potential legal definitions of “being misled.” Upon seeing a positive term on the product label, a Bayesian consumer forms a belief, which is a distribution of the possible quality levels. A standard that holds a seller liable for using the positive term when the true quality is below a Bayesian consumer’s expectation of the quality or was deemed sufficiently unlikely low by the Bayesian consumer will cause an Akerlof (1978) style unraveling of communication. A lack of informative communication will lead to a lack of ex-ante effort in providing the quality. More efficient labeling behaviors can be encouraged by a belief-independent rule that is achievable by certification.