Wednesday, April 25, 2007

No, I Don't Believe in Consumer Protection Law

Peter up at HK Competition Law asked:

"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?"

Read more of Pete's comments here, and my original post here.

My answer to Pete's question of whether I think there is a place for consumer protection law is NOPE. A lot of studies have been conducted aiming at evaluating the effectiveness of consumer protection regulations and most of them would tell us that the costs of having such law far outweigh the benefits they would bring.

Here is one example:

"Since the 1910s, the Federal Trade Commission has sought to promote truth in advertising. Specifically, it is responsible for preventing deceptive acts or practices in the sale of various products, with particular attention given to food, drugs, and alcohol. In accordance with its regulations that define deceptive practices, the FTC conducts investigations of alleged falseadvertising and can order firms to stop running particular ads.

Peltzman (1981) found that the investigations raised firms’ costs, but itwas unclear whether they enabled consumers to make more informe dchoices that enhanced their welfare."

The above quotation is from p.29 of the excellent book by Brookings scholar Clifford Winston. The title of the book is aptly named as Government Failure vs Market Failure. Read it for free here.

Since I expect readers of this post would read Winton's book themselves, so my response would be brief.

People expect government would do a better job than the market in protecting consumers because they assume:

1) While market imperfections (or what they would label as market failures) are widespread, government operates smoothly without a glitch. This is what Harold Demsetz, a professor of economcis at UCLA, called the nirvana approach to economics in his 1969 piece "Information and Efficiency: Another Viewpoint," Journal of Law and Economics.

2) Government officials are actually out there to serve US and not themselves. So a person who would be a greedy monster if he or she works in the private market would suddenly turn into a saint once he or she joins the government.

I think both of these assumptions are false.

So both theory and evidence reported in empricial studies convince me consumer protection laws have only a very small role to play, if there is any, in our economy.

1 comment:

Beda M. Biswalo said...

qxlupIf I may ask, do you honestly believe that the benefits of consumer protection are too far insignificant?

You stated in your blog that research has proven that the costs of having consumer protection law far outweigh the benefits they would bring, to what extent do you believe such findings are true?

Is it the issue of the consumer protection law that you think is a husttle here or you belive the issue of consumer protection is altogether a waite of time?

Let's look at this senario here, Swazilan has quite a few monopolies in industries such as the water, electricity, telecommunications, insurance, just to name a few. Now, these monopolies can do anything, such as increasing prices without even warning customers in advance, provide goods of poor quality, etc. Do you believe that in such conditions having a consumer protection law is still useless.

Maybe you were more focused on the free-market economy where producers battle it out to get customers, and usually at the end the customer wins in price reduction. However, this is not to say that customer is the absolute winner, believe me...if businesses did not win they would not stay in business - survival theory! You are most likely to find that the reductionin prices comes with reduction in product quality, poor service, etc.

Anyways, maybe we should look at it from the information point of view. Don't ou think that it is of absolute important that sellers provide consumers with complete information about product and services? For example, in areas where products are more complex and require a high level of understanding, lets use health doctors. How often do you go to see a doctor and believe in whatever he/she prescibes for you juast because you believe he/she is an authority? Doesn't this give doctors room to act in Unscrupulous manner? such as prescibing you Grandpa because it costs more even though panado (costing less) was the better option for you!

Whith new technology comes new ways of doing things. Marketers are definately not behind. With so much competition out there, marketers are doing everything possible to fish clients. Dont you think that consumers at the end of the day are affected by this and therefore deserving some form of protection? How often do we see ads that are so convincing but when you find the real deal is so disappointing. Here you incur psychological cost, financial costs, time etc. Do you think its a fair practise?

With internet netting people like a fishign net does to fish, people are begging to believe in buying physical products without examining the by touching as they would do in the past, so they order, and when the products ain't what they saw! Do you think this is perfect?

I'm not saying that we should only care about customers only and forget business. Businesses and customers are one. One makes one consumes. Without consumer there will be no maker, without maker there will be no consumer. But, in my opinion businesses still have the uper hand, and using that upper hand wrongly, faudulently, and unfairly!

I'm not wishing for the time to come when the bargaining power will totaly shift to the consumer, but I don't think its also fair for businesses to have the ultimate power.

Everybody is a consumer at some point and everybody is a producer at some point. When we act as consumers we have no feel powerless but when we act as producers we also take advantage of that powerless consumer. if we could ever strike the ballance between the two, then and only then, its when there will be no need for consumer protection? But, cann we hit the balance without the help of consumer protection law? I wonder!

Maybe just to mention, I have absolutely nothing against you but I just felt that it would be good to debate a liltle for posible generation of new knowledge. Funny, I'm a marketer myself...and we receive a lot of critism from customer rights protection groups, but what the heck!

Hit me back!

Beda M. Biswalo