Abstract

This paper explores the rational for advertising restrictions in the market for professional services. Professional services are characterised by considerable asymmetric information between professionals and consumers. This justifies regulation in such markets, for instance through licensing, qualifications requirements, and other minimum quality standards. However, once consumers' protection is guaranteed by the previous regulatory instruments, it is not clear why prohibiting professionals to disclose information through advertising should be welfare improving. In fact, both economic theory and empirical evidence support the opposite view. By "truthfully" advertising, professionals can provide very useful information to consumers. This helps them to identify the services and the professionals best suited to their needs, reducing time and energy spent in search activity. In turn, professionals would operate in a more competitive environment, which would decrease prices. Advertising might also help less experienced professionals to form a clientele. This should promote entry and exert additional competitive pressure. Finally, there is no evidence supporting the claim that quality should decrease as a result of advertising. Our conclusion is that there is no economic reason why truthful informative advertising should be prohibited in the market for professional services. (While deceptive and not substantiated claims are already punished by Consumer Protection Laws.) The effort exerted by professional orders to maintain such legal restrictions appears to be motivated by the intention to weaken competition rather than to benefit consumers.