Consumer protection and behavioral economics: To BE or not to BE?

Competition Policy International

Volumn 4, Issue 1, 2008, Pages 149-167

  Beales, J Howard ^a  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

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EID: 70350155170     PISSN: 15540189     EISSN: 15546853     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (76)

1. OECD, DIRECTORATE FOR SCIENCE, TECHNOLOGY & INDUSTRY, COMMITTEE ON CONSUMER POLICY, ROUNDTABLE ON DEMAND-SIDE ECONOMICS FOR CONSUMER POLICY: SUMMARY REPORT (2006) [hereinafter OECD Report].
2. U.S. Federal Trade Commission, Conference on Behavioral Economics and Consumer Policy, Washington, DC (Apr. 20, 2007), at http://www.ftc.gov/be/ consumerbehavior/index.shtml (last visited Feb. 19, 2008).
3. AUSTRALIAN GOVERNMENT PRODUCTIVITY COMMISSION, REVIEW OF AUSTRALIA'S CONSUMER POLICY FRAMEWORK, DRAFT REPORT app. B (2007) [hereinafter Australian Report], available at http://www.pc.gov.au/-data/assets/pdf-file/0006/73662/ consumer2.pdf.
4. C.R. Sunstein & R.H. Thaler, Libertarian Paternalism is Not and Oxymoron, 70 U. CHI. L. REV. 1159 (2003).
5. O. Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373 (2004).
6. FTC v. Algoma Lumber Co., 261 U.S. 67, 78 (1934) (citations omitted).
7. G. J. Stigler, The Economics of Information, 64 J. POL. ECON. 213 (1961).
8. Id. at 220.
9. P. Nelson, Advertising as Information, 82 J. POL. ECON. 729 (1974).
10. B. Klein & K. B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615 (1981).
11. Unfolding occurs if consumers assume that absent disclosure, a product is worse on the characteristic than products that disclose. See S. Grossman, The Informational Role of Warranties and Private Disclosure About Product Quality, 24 J.L. & ECON. 461 (1981);
12. and P. Rubin, The Economics of Regulating Deception, 10(3) CATO J. 667 (1991).
13. A. Schwartz & L.L. Wilde, Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis, 127 U. PA. L. REV. 630 (1979).
14. For evidence addressing shopping for standardized franchise contracts, see J.H. Beales & T.J. Muris, The Foundations of Franchise Regulation: Issues and Evidence, 2 J. CORP. FIN.: CONTRACTING, ORGANIZATION & GOVERNANCE 157 (1995).
15. For evidence of shopping for personal loan terms, see J.R. Barth, J.J. Cordes, A.M.J. Yezer, Benefits and Costs of Legal Restrictions on Personal Loan Markets, 29 J.L. & ECON. 157 (1986).
16. The first study finding that advertising reduced price was L. Benham, The Effect of Advertising on the Price of Eyeglasses, 15 J.L. & ECON. 337 (1972). For evidence of the impact of health claims on the market,
17. see P.M. Ippolito & A.D. Mathios, Information, Advertising and Health Choices: A Study of the Cereal Market, 21 RAND J. ECON. 459 (1990)
18. Other studies of both price and quality benefits of seller-provided information are identified in J. HOWARD BEALES & TIMOTHY J. MURIS, STATE & FEDERAL REGULATION OF NATIONAL ADVERTISING ch. 2 (1993).
19. For broadcast advertising, see J. JACOBY,W. D. HOYER & D. A. SHELUGA, MISCOMPREHENSION OF TELEVISED COMMUNICATIONS (Am. Ass'n Advertising Agencies, Nov. 1980).
20. See also 46 J. MARKETING 12-43 (1982) for a summary of the study, critical comments on its validity, and a rejoinder. For print advertising,
21. see J. Jacoby & W. D. Hoyer, The Comprehension/Miscomprehension of Print Communication: Selected Findings, 15 J. CONSUMER RES. 434 (1989).
22. The Commission formally abandoned the so-called "fools test" when it adopted the Deception Policy Statement in 1983. The emergence of the FTC's modern approach to advertising regulation is discussed in detail in Beales & Muris (1993), supra note 14.
23. For a brief description of the FTC's analytical approach, see Pauline Ippolito, Consumer Policy at the FTC, Presentation at the FTC Conference on Behavioral Economics and Consumer Policy,Washington, DC (Apr. 20, 2007), available at http://www.ftc.gov/be/consumerbehavior/docs/transcript/transcriptc. pdf.
24. See, e.g., C.S. Craig, B. Sternthal & C. Leavitt, Advertising Wearout: An Experimental Analysis, 13 J. MARKETING RES. 365 (1976);
25. A.J. Rethans, J.L. Swasy & L.J. Marks, Effects of Television Commercial Repetition, Receiver Knowledge, and Commercial Length: A Test of the Two-factor Model, 23 J. MARKETING RES. 50 (1986).
26. See the discussion in J.P. Mulholland, Summary Report on the FTC Behavioral Economics Conference (2007) (mimeo) (on file with the FTC), at http://www.ftc.gov/be/consumerbehavior/docs/ 070914mulhollandrpt.pdf [hereinafter Mulholland Summary]. See also J. Rudd, The Consumer Information Overload Controversy and Public Policy, 2 POL'Y STUD. REV. 465 (1983).
27. H. Beales, R. Craswell & S.C. Salop, The Efficient Regulation of Consumer Information, 24 J.L. & ECON. 491 (1981).
28. J. Lacko & J. Pappalardo, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment, FTC BUREAU OF ECONOMICS STAFF REPORT (2004), available at http://www.ftc.gov/os/2004/01/ 030123mortgagefullrpt.pdf.
29. See I. Ayres & R. Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Default Rules, 101 YALE L.J. 729 (1992);
30. C.J. Goetz & R.E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261 (1985).
31. See T.J. Muris, The Federal Trade Commission and the Fugure Development of U.S. Consumer Protection Policy, Remarks before the Aspen Summit, Cyberspace and the American Dream, The Progress and Freedom Foundation, Aspen, Colorado (Aug. 19, 2003), available at http://www.ftc.gov/speeches/ muris/030819aspen. shtm.
32. There is, as yet, no generally agreed on set of behavioral effects or terminology to describe them. This categorization draws heavily on the lists developed in the OECD (supra note 1) and Australian (supra note 3) Reports. Another useful categorization focused on factors relevant to excessive borrowing can be found in C.R. Sunstein, Boundedly Rational Borrowing, 73 U. CHI. L. REV. 249 (2006).
33. E. Johnson & D. Goldstein, Do Defaults Save Lives?, 302 SCI. 1338 (2003).
34. Brigitte C. Madrian & Dennis F. Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, 116 Q.J. ECON. 1149 (2001).
35. Milton Friedman, The Methodology of Positive Economics, in ESSAYS IN POSITIVE ECONOMICS (1953).
36. For example, much of the research presented at the FTC Conference on Behavioral Economics and Consumer Policy, supra note 2, was based on field experiments.
37. S. Levitt & J. List, What Do Laboratory Experiments Tell Us About the Real World? (2006) (mimeo, University of Chicago and NBER), available at http://pricetheory.uchicago.edu/levitt/Papers/jep%20revision%20Levitt%20& %20List.pdf; and J. List, The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions, 114 J. POL. ECON. 1 (2005).
38. Vernon L. Smith & James M.Walker, Monetary Rewards and Decision Cost in Experimental Economics, 31 ECON. INQUIRY 245 (1993).
39. Brigitte C. Madrian & Dennis F. Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, 116 Q.J. ECON. 1149 (2001).
40. H. Ergas, Policy Implications of Behavioural Economics: The Case of Consumer Protection, Paper presented at the Australian Productivity Commission's Roundtable on Behavioural Economics and Public Policy, Melbourne (Aug. 9, 2007).
41. C. Plott & K. Zeiler, The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations, 95(3) AM. ECON. REV. 530 (2005).
42. E. Lazear, Remarks at the FTC Conference on Behavioral Economics and Consumer Policy,Washington, DC (Apr. 20, 2007), at 14, available at http://www.ftc.gov/be/consumerbehavior/docs/transcript/ transcriptopen.pdf.
43. E. LAZEAR, U. MALMENDIER & R.WEBER, SORTING IN EXPERIMENTS WITH APPLICATION TO SOCIAL PREFERENCES (Nat'l Bureau of Econ. Research,Working Paper No. 12041, 2006), available at http://www.nber.org/papers/w12041.
44. Australian Report, supra note 3, at 311.
45. N. Berg & G. Girgerenzer, Psychology Implies Paternalism? Bounded Rationality May Reduce The Rationale To Regulate Risk-Taking, 28 SOC. CHOICE WELFARE 337 (2007),
46. J. Klick & G Mitchell, Government Regulation of Irrationality: Moral and Cognitive Hazards, 90(6) MINN. L. REV. 1620 (2006).
47. OECD Report, supra note 1, at 17.
48. J.P. Mulholland, Behavioral Economics and the Federal Trade Commission, Paper presented at the Australian Productivity Commission's Roundtable on Behavioural Economics and Public Policy, Melbourne (Aug. 9, 2007); and Mulholland Summary, supra note 19, at 27.
49. Bar-Gill (2004), supra note 5.
50. G. Loewenstein & T. O'Donoghue, 'We Can Do This the Easy Way or the Hard Way': Negative Emotions, Self-Regulation, and the Law, 73 U. CHI. L. REV. 183 (2006).
51. R.J. MANN, CREDIT CARDS, CONSUMER CREDIT & BANKRUPTCY (University of Texas School of Law, Law and Economics Working Paper No. 044, 2005), available at http://www.ssrn.com/abstract=690701.
52. Transcript of Session F, Consumer Choice: Credit Cards, FTC Conference on Behavioral Economics and Consumer Policy,Washington, DC (Apr. 20, 2007), at 39-40, available at http://www.ftc.gov/be/ consumerbehavior/docs/transcript/ transcriptf.pdf.
53. J.H. Beales & L.L. Plache, Rationality, Revolving, and Rewards: An Analysis of Revolving Behavior on New Credit Cards, Paper presented at the FTC Conference on Behavioral Economics and Consumer Policy,Washington, DC (Apr. 20, 2007), available at http://www.ftc.gov/be/consumerbehavior/ docs/papers/Beales- Plache-Paper.pdf.
54. E. Lazear, Economic Imperialism, 115(1) Q.J. ECON. 99 (2000).
55. Alan Schwartz, How Much Irrationality Does the Market Permit?, 37 J. LEGAL STUD. (forthcoming 2008).
56. Richard A. Epstein, Behavioral Economics: Human Errors and Market Corrections, 73 U. CHI. L. REV. 111 (2006).
57. John A. List, Does Market Experience Eliminate Market Anomalies?, 118 Q.J. ECON. 41 (2003).
58. Becker and Stigler use the household production model to explore a number of situations in which human capital stocks are important. See G.J. Stigler & G.S. Becker, De Gustibus Non Est Disputandum, AM. ECON. REV. 76 (1977).
59. S. Agarwal, J. C. Driscoll, X. Gabaix & D. Laibson, Stimulus and Response: The Path from Naïveté to Sophistication in the Credit Card Market (Aug. 2006), Paper presented at the FTC Conference on Behavioral Economics and Consumer Policy,Washington, DC (Apr. 20, 2007), available at http://www.ftc.gov/be/consumerbehavior/docs/Agarwal-Driscoll-Gabaix-Laibson.pdf.
60. S. AGARWAL, J. DRISCOLL, X. GABAIX & D. LAIBSON, THE AGE OF REASON: FINANCIAL DECISION-MAKING OVER THE LIFECYCLE (MIT Department of Economics,Working Paper No. 07-11, 2007).
61. E. Miravete & I. Palacios-Huerta, Rational Attention in a Repeated Decision Problem (2004) (mimeo, University of Texas), available at http://www.eco.utexas.edu/facstaff/Miravete/papers/EJM-IPH.pdf.
62. This point was made by Pauline Ippolito at the FTC conference. See Mulholland Summary, supra note 19, at 23.
63. E. Miravete & I. Palacios-Huerta (2004), supra note 52.
64. Australian Report, supra note 3, at 319.
65. C. Camerer, S. Issacharoff, G. Loewenstein, T. O'Donoghue & M. Rabin, Regulation for Conservatives: Behavioral Economics and the Case for "Asymmetric Paternalism", 151 U. PA. L. REV. 1211 (2003).
66. Id. at 1251.
67. Mulholland (2007), supra note 39. For a description of the FTC's current approach to unfairness analysis, see J.H. Beales, The Federal Trade Commission's Use of Unfairness Authority: Its Rise, Fall, and Resurrection, 22(2) J. PUB. POL. & MARKETING 192 (2003).
68. Sunstein & Thaler (2004), supra note 4.
69. Bar-Gill (2003), supra note 5, at 1378.
70. Mulholland (2007), supra note 39, at 13.
71. Mulholland Summary, supra note 19, at 24.
72. Australian Report, supra note 3, at 324.
73. OECD, supra note 1, at 5.
74. In the context of Australian consumer policy, which is broadly similar to the U.S. approach, the Australian Productivity Commission reached a similar conclusion: "Much policy is already based on, or implicitly accounts for, behavioral tenets." Australian Report, supra note 3, at 309.
75. Eugenio J. Miravete, The Doubtful Profitability of Foggy Pricing (2007) (mimeo, University of Texas), available at http://www.eco.utexas.edu/facstaff/ Miravete/papers/EJM-Foggy.pdf.
76. J.H. Beales & T.J. Muris, Choice or Consequences: Protecting Privacy in Commercial Information, 75 U. CHI. L. REV. (forthcoming 2008).