The Law and Economics of Consumer Protection

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The Law and Economics of Consumer Protection

• Antonina Bakardjieva Engelbrekt
• antonina.bakardjieva_at_juridicum.su.se

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Law and Economics What to expect?
Economic theory still enjoys an uneasy
relationship with legal doctrine. It can be an
aid to understanding, and thus to the proper
formulation of good doctrine. It can also be an
aid for mystification, and thus to the
legitimation of good, bad or indifferent
doctrine. The one thing it probably cannot do is
itself to prescribe the good but at its most it
should assist the law-maker and the law-applier
in transforming the prescribed value into
prescribed action.     Buxbaum, in
Daintith/Teubner, Contract and Organisation,
1986, 274
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Consumer Law and Policy a Background

• The changing context of consumption
• Impact on consumers
• The consumer rights movement

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Classical Economic Theory and Information

• The Neo-Classical Competition Model Some
  Assumptions
• Transparency (perfect information)
• Given and stable preferences
• Rationality of market actors

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Information Economics

• Ignorance and Uncertainty
• Information Asymmetry
• (Bounded Rationality)

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Information in Economics

• CLASSICAL ECONOMIC THEORY
• information is not an issue
• advertising a barrier to entry
• INFORMATION ECONOMICS
• in many contexts information matters

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The Cost of Search
?ij Pi wjlij   n    j - buyer n    i -
unit good n    w - opportunity cost of time
n    l - time spent per unit good    
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Information-Based Classification of Product
Characteristics

• Search
• Experience (Nelson)
• Credence (Darby/Carni)
• Other relavant aspects
• frequency of purchase (durable/non-durable)
• low-price/high-price

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Information as a Public Good

• Non-exclusivity
• Non-rivalrous consumption
• Non-appropriability
• - indivisible
• - inspection prior to purchase impractical

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Problem areas

• Free riding and undersupply of information
• Opportunistic behaviour (misrepresentation)
• Lemon markets (Akerlof)
• - experience/credence goods
• - bad quality cheaper to produce
• - no way to communicate high quality

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Market Responses to Information Imperfections

• Signals
• - goodwill trademarks
• - advertising as a signal
• - warranties
• - high prices
• Bonds

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A Need for Intervention?

• Depending on Market Structure
• - Monopoly
• - Oligopoly
• - Turbulent markets
• Depending on product market
• - strong information asymmetry (credence)
• - rarely-purchased high-value goods
• - common negative product characteristics (e.g.
  tobacco)

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Instruments of regulation

• Competition policy as consumer policy
• Combatting oppotunism e.g. ban on misleading
  advertising
• Protecting signals (trade marks reputation)
• Mandatory information disclosure
• Liberalising truthful information (e.g.
  comparative advertising)

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Comparative Institutional Analysis

• Choosing Between Imperfect Alternatives
• (Neil Komesar)
• The market
• The political system
• The administrative process
• The courts
• Institutions tend to move together

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Consumer Protection in the Political System
Examples

• USA Ralph Nader v. Big Business
• Sweden Labour organisations
• Germany Mittelstand

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Consumer protection alternative enforcement
approaches

• The administrative process
• - USA FTC
• - Sweden Consumer Agency with Consumer Ombudsman
  (example the guidelines debate)
• The courts
• - Germany Private Consumer Organisations

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The influence of the past on present
institutional choices

• (D. North)
• Path dependence
• Lock-ins