Laissez-faire capitalism can be founded on various beliefs.
It may be based on a view of humanity as basically rational. In that view, humans will pay more for something which meats their needs and wants better, and the mass of humans purchasing on that basis will result in a kind of democratic price setting. If this is the basis, it is faulty due to the fact that humans are immensely affective and can therefore be affected in non-rational ways.
It may be believed that humans are not rational, but that the various ways in which they are non-rational will even out when they are taken in mass. The problem here, again, has to do with advertizing: advertizements are produced in order to get people to buy the product and, thus, to be willing to pay more for it. If advertizements did not affect people generally to buy the product, then advertizements would not exist.
There is therefore an affective component to purchases. Thus when we purchase, we do not purchase purely rationally. Instead, in buying an item, a person is buying the product itself as well as the values and such associated with the product via the advertizing, but what they leave the store with is just the product (and some good feelings).
It may be that it is believed that the advertizing will even out between competitors. That is, that the advertizing for one product will not be significantly better than advertizing for its competitor product. Nevertheless, the competition is often largely in the realm of advertizing, rather than product quality, since at some point the difference in quality becomes nearly, if not entirely, indistinguishable, and since better advertizing can be easier and cheaper than better quality.
So, the questions:
Is there a better way of handling this stuff?
If not, what would be requisite to making this work better?
Any regulation by the government requires that the government be rational. This might, possibly, be more likely than individuals doing so. It would require an understanding of the costs involved, as well as what factors into the quality of the product, and it would require this understanding for basically every kind of product. The problem we would have is that people would vote companies out of business out of a lack of this understanding--basically: the risks of regulation are higher, probably too high, and what is requisite to making it work is beyond what can be expected within anything resembling the current system.
It might be possible to regulate some areas, but not others. Entertainment, for instance, seems perfect for laissez-faire capitalism, since the affective is part of the product anyway. I suspect that employment is another area, since employers do need employees. The only question there is whether it would come out in such a way that employees could survive (of times to try, now, the age of advertizing by being ethical and giving to charities, would probably be among the best times to do so). Sporting goods would be an edge case, insofar as most people don't know how to judge the quality of a helmet, but the design on the helmet may be part of the product.
What arises from this kind of thinking is an answer to the second question: what would be requisite to making laissez-faire capitalism work better? That people, generally, be able to understand what goes into the products they buy. This is part of what is supposed to be going into reviews of products. It might also be wise to teach kids advertizing (and, while we're at it, statistics) in schools for the sake of giving them the capacity to reverse-engineer what is going on in advertizements, and thus make it more necessary for there to be content (and verifiability) to the advertizements. This analysis will give people distance from the affects of advertizing, thus protecting them from merely affective purchases (at least, insofar as the affect comes from the advertizing).