Monday, April 23, 2007

Firms Compete at Multiple Margins

In response to my earlier post on consumer protection law, Peter asked:

"Could the issue be one of the availability and reliability of information in consumer transactions? "

Producers, of course, have more info regarding characteristics of their products compared with consumers. Sellers would be compelled by competition to try the best they could to lure customers. One way to do so, of course, is to compete against in each other in doing the best they could to inform customers about their products.

In other words, competition is multi-dimensional. It entails not only price, quantity and quality, it would include after-sales services like warranties to address the information asymmetry problem as well in producers' bid to draw customers.

Peter also asked:

"Take a law against misleading or deceptive conduct, for instance. We already have such a law in the form of section 7M of the Telecommunications Ordinance, but it only applies to telecommunications licensees. What's your view on the need for/effectiveness of this prohibition in what is a very competitive industry (there are a number of decided cases on the OFTA website www.ofta.gov.hk)? Could it be of greater utility in other industries? "

I would caution against attributing the well-functioning character of the telecom market to that section 7M. One has to bear in mind that once HK starts liberalizing its telecom market, competitive forces are unleashed, and my argument is that these competitive forces would ensure that the information aysmmetry problem would be adequately addressed.

Hence, one should be careful about the reverse causality problem here. That is, the well-functioning of the telecom market as a result of the intense competition introduced after liberalization creates the false impression that the causality runs the other way (ie the smooth working of the market is a consequence of the existence of section 7M in the Telecom Ordinance).

1 comment:

Peter said...

My suggestion is that section 7M is arguably least needed in the telecommunications industry for the reasons noted. Having said that, there have been a number of decided cases (some with fines) where misleading and deceptive conduct has been identified in the telecommunications industry despite the high level of competition within the market. I don't believe that 7M is a cause of much, but rather a means of addressing practices that everyone in Hong Kong knows about - but which most of us get caught by at some time or other. Can any of us say we have never been misled or deceived as a consumer in Hong Kong? Do you think just having the law on the books might help change the methods of some retailers? I'm know that at a macro level we can leave competitive markets to work things out over the longer term, but at the micro level (like you or me as a single consumer entering into a single transaction) is there a need for some protection against unscrupulous businesses? The theory is good, but the reality can be quite different. I know there are problems with law enforcement etc. But as a concept, do you think some consumer protection is a good thing (for instance, mandatory product labelling) or should we not bother?