Protecting Consumers

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Protecting Consumers

• Kevin Hinde

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Introduction

• Examines the policy framework within the UK and
  EC that focuses on controlling the worse excesses
  of rogue trading.
• Explores two problems faced by consumers and
  reputable traders alike adverse selection and
  moral hazard.
• Briefly considers the role of self-regulation as
  a mechanism for addressing the problem and
  considers alternatives

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Consumer Protection in Europe

• The European Commission
• DGXXIV
• Article 153
• The UK
• Various government departments
• Local government
• Consumer Organisations

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Impact of Consumer Complaints
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(No Transcript)
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Consumer Detriment

• OFT has tried to capture the loss in consumer
  surplus
• consumer detriment in the UK totaled 8.3
  billion per annum, equivalent to 1.5 of annual
  household consumer expenditure.
• approximately 180 per adult every year and
  approached 1 of Gross Domestic Product
• an underestimate?

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Explaining Consumer Complaints

• Most markets work well
• Frequent transactions and few resources tied up
  with the exchange process.
• However,
• Adverse Selection
• Moral Hazard

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Adverse Selection

• Defined as a process by which an undesirable
  population of buyers or sellers with an
  information bias are more likely to participate
  in voluntary exchange.
• In this instance the undesirable population are
  sellers (cowboys) and they are attracted to the
  market in general before any transaction has
  taken place because of the potential returns.

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Adverse Selection

• Double Glazing Example
• 75 chance of high quality service
• 25 chance of poor quality service
• High quality costs 2600
• Low Quality costs 1800
• Expected Value
• (0.75 x 2600) (0.25 x 1800) 2400
• Market will not perform efficiently it may even
  fail to operate altogether!

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Moral Hazard

• An ex post contractual problem that may result
  because participants to the exchange process have
  information that allows them to act in an
  opportunistic manner once the transaction has
  been entered into.
• Double Glazing example. Customer chooses a
  supplier, pays over a deposit but once locked
  in to the transaction supplier may act with
  guile.

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Overcoming the problem

• Contracts
• Warranties, guarantees and insurance
• Brands
• Self Regulation
• Signalling and Screening
• Problems of Self Regulation
• Screening costs
• Cartels
• Profusion of Institutes
• Credibility

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Self Regulation versus Statutory Regulation

• Doyle(1997) notes that self regulation is
  relevant where
• Organisational Structures are simple
• Competition is vigorous
• Goods and services are well defined
• Information is largely in the public domain
• Statutory Regulation is required where
• Structures are complex hierarchies, including
  transnational operations
• Goods and services are complex such that
  information asymmetries may exist
• A two-tiered approach is used in many
  industries, i.e. the law is used as a weapon of
  last resort.

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Some web references

• Vickers J (2003) Economics for Consumer Policy,
  British Academy Keynes Lecture, OFT Speech, 29th
  October 2003 (You dont need to know the model in
  the appendix).
• Self Regulation and statutory Regulation,
  Business Strategy Review, vol. 8, no.3, 35-42,
  Summer. Available via the Librarys Electronic
  Journal Gateway.