The Pros and Cons of Consumer Protection
The conference The Pros & Cons of Consumer Protection, hosted by the Swedish Competition Authority, focused on consumer protection, competition policy and the implications of the recent developments in behavioral economics for these policy areas. William Kovacic, at George Washington University and formerly at the FTC, moderated the conference, which took place at the World Trade Center in Stockholm on the 11th of November 2011.
Contributors (back row, from the left): Russell Damtoft, Declan Purcell, Dan Sjöblom, Joachim Lücking, Páll Gunnar Pálsson, Oren Bar-Gill, Paul Heidhues, Maurice Stucke, William Kovacic (Front row, from left): Sten Nyberg, Christine Meyer, Søren Gaard, Matthew Bennet, Mark Armstrong.
Oren Bar-Gill from New York University discussed whether the benefits of competition that obtain in a world of rational consumers also extend to world with imperfectly rational consumers. He argued that sellers will adapt their behavior and may exploit consumer misperceptions and that the circumstances under which firms have incentives to educate consumers are rather limited. Policies mandating disclosure of information, including information about how consumers use the product, may improve welfare.
Paul Heidhues, of the European School of Management and Technology, proceeded to speak about how firms may set fees to exploit consumer misperceptions about their own behavior or the features of contracts in credit markets. He noted that competition may provide insufficient evidence for firms to disclose, or unshroud, the true costs of contracts. Moreover, this is more likely in concentrated markets, which provides one example how the effects of consumer protection and competition policy, here in the form of merger regulation, are intertwined.
That competition and consumer protection policies are interrelated was also emphasized by Maurice Stucke, from the University of Tennessee, who discussed the implications of bounded rationality on the part of consumers for our conception of competition and its effect on consumers. With boundedly rational consumers preferences cannot readily be inferred from choices and competition may help consumers, e.g. provide commitment devices, but can also lead to exploitation of consumers, which can motivate behavioral remedies. However, policy interventions require that authorities, that may be boundedly rational themselves, can identify the problems and should also factor in the value of the consumers’ freedom to choose.
Mark Armstrong from Oxford University discussed information based models of consumer protection without behavioral biases. Consumers may search for information about price and product features themselves or rely on information provided by the market, e.g. by sellers. In the former case, certain sales tactics may harm consumers. However, consumer protection policies could also have negative effects. Polices that lead to reduced search effort, may well result in higher market prices. If consumers rely on sellers for information, commission based contracts may distort the incentives for providing accurate information.
Designing policy interventions to protect consumers is often difficult and contingent on the characteristics of the specific market. Also, as Matthew Bennet from the Office of Fair Trading pointed out, markets can be self-correcting. Consumers may learn, markets self regulate, and other parties could profit from correcting the problem. In addition, policy intervention may itself be distortive. It is therefore useful to establish sound economic principles to help determine, in a systematic way, whether a policy intervention has merit. The presentation outlined four principles in the context of a discussion on the effects of contingent charges, such as overdraft fees. While the principles could be interpreted as consistent with the letter of the applicable UK legislation, a recent precedent seems to provide little scope for legal action against contingent charges.
Comments on the presentation were offered by Declan Purcell, Irish Competition Authority; Søren Gaard, Danish Competition and Consumer Authority; Joachim Lücking, European Commission; Russell Damtoft, Federal Trade Commission; and Christine Meyer, Norwegian Competition Authority.
The conference ended with a panel session on Competition Policy and Consumer Protection with a focus on the coordination of consumer protection and competition policies within or between authorities. Russell Damtoft discussed the linkages and differences between these policy areas and how the work on these is organized at the FTC, which is responsible for both areas. Søren Gaard related the Danish experience of recently merging these policy areas in one authority and spoke of the synergies of doing so. The Irish Competition Authority also covers both areas and Declan Purcell, formerly with the authority, gave an account also reflecting some difficulties in combining these tasks. In Iceland the policy areas were formerly under one authority and Páll Gunnar Pálsson discussed the merits of specialization. In Norway there are separate authorities for competition and consumer protection and Christine Meyer argued that this worked well and saw relatively little overlap between the areas in practice.