Consumer protection policies, economics, and interactions with competition policy

Competition Policy International

Volumn 4, Issue 1, 2008, Pages 83-96

  Pautler, Paul A ^a  

^a FEDERAL TRADE COMMISSION   (United States)

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[No Author keywords available]

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EID: 70350164638     PISSN: 15540189     EISSN: 15546853     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (35)

1. See A Symposium on Consumer Protection, 4(1) COMPETITION POL'Y INT'L 83-222 (Spring 2008).
2. Mark Armstrong, Interactions between Competition and Consumer Policies, 4(1) COMPETITION POL'Y INT'L 97-147 (Spring 2008) [hereinafter Armstrong].
3. Howard J. Beales, III, Consumer Protection and Behavioral Economics: To BE or not to BE?, 4(1) COMPETITION POL'Y INT'L 149-67 (Spring 2008) [hereinafter Beales].
4. Paul H. Rubin, Regulation of Information and Advertising, 4(1) COMPETITION POL'Y INT'L 169-92 (Spring 2008) [hereinafter Rubin].
5. Claudio Tesauro and Francesco Russo, Unfair Commercial Practices and Misleading Comparative Advertising: An Analysis of the Harmonization of EU Legislation in View of the Italian Implementation of the Rules, 4(1) COMPETITION POL'Y INT'L 193-222 (Spring 2008) [hereinafter Tesauro & Russo].
6. Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market, 2005 O.J. (L 149) 22.
7. Tesauro & Russo, supra note 5, at 211.
8. See M. Salinger, P. Ippolito & J. Schrag, Economics at the FTC: Pharmaceutical Patent Dispute Settlements and Behavioral Economics, 31 REV. INDUS. ORG. 85-105, 97-104 (Sep. 2007) for an economist's view of a similar FTC unfairness law and how it works.
9. Tesauro & Russo, supra note 5, at 209-11.
10. This is similar to the notion of "materiality" in U.S. consumer law. If a claim is material, then it presumably can alter the consumer's decision.
11. Tesauro & Russo, supra note 5, at 198, 211.
12. Id. at 219.
13. Beales, supra note 3, at 151-52 and Rubin, supra note 4, at 187-88.
14. S. Grossman, The Informational Role of Warranties and Private Disclosure About Product Quality, 24 J.L. & ECON. 461-83 (Dec. 1981).
15. G. Jin & P. Leslie, The Effects of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards, 118(2) Q.J. ECON. 409-51 (May 2003).
16. A. Mathios, The Impact of Mandatory Disclosure Laws on Product Choices: An Analysis of the Salad Dressing Market, 43(2) J.L. & ECON. 651-78 (Oct. 2000).
17. For additional examples, see P. Ippolito & A. Mathios, The Regulation of Science-Based Claims in Advertising, 13 J. CONSUMER POL'Y 413-45 (1990). They discuss research showing nearly complete unfolding for ready-to-eat cereals and butter and margarine, but substantially incomplete unfolding in frozen pizzas and cigarettes.
18. The list of factors that cause consumers to fail systematically to optimize includes emotional states, inattention, disinterest, inability to solve complex problems, myopia (present bias caused by imperfect discounting in time dimension), framing effects, anchors, over-optimism, overconfidence, endowment effects, lack of self-control, status quo bias, excessive risk aversion (overestimation of some risks-choosing too low an insurance deductible, and underestimation of others-ignoring small, distant risks that have a high cost if they occur), and projection bias (what happened to my friend will happen to me), to name a few. D. Kahneman, Maps of Bounded Rationality: Psychology for Behavioral Economics, 93(5) AM. ECON. REV. 1449-75 (2003) describes human tendencies to revert to inexact intuition when problems are hard or decisions must be made quickly.
19. The need to examine consumer behavior and market outcomes following a period of learning was the most obvious lesson from the FTC's April 20, 2007 Behavioral Economics Conference. For the agenda, some of the presentations, and a summary of the conference authored by Joe Mulholland, see Federal Trade Commission, Bureau of Economics, at http://www.ftc.gov/be/consumerbehavior/ index.shtml. See also M. Salinger, P. Ippolito & J. Schrag, Economics at the FTC: Pharmaceutical Patent Dispute Settlements and Behavioral Economics, 31 REV. INDUS. ORG. 85-105, 97-104 (Sep. 2007).
20. See X. Gabaix & D. Laibson. Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121(2) Q.J. ECON. 505-40 (2006).
21. This list ignores the teachings of the economic theory of regulation that one cannot treat the regulator as a benign social planner. One would need to evaluate the outcome of the policy change to be sure that the results were welfare enhancing.
22. Firms altered their behavior to market healthier ready-to-eat cereals and better versions of fats and oils. A policy reversion at one point caused certain heart health claims to virtually disappear. Paul Rubin's paper in this issue recounts part of that story and more of the history of the health claims debate is provided in L. Froeb, D. Hosken & J. Pappalardo, Economics Research at the FTC: Information, Retrospectives, and Retailing, 25 REV. INDUS. ORG. 353-74, 355-60 (2004).
23. For a brief description of consumer protection as seen through the eyes of two economists, see L. Froeb & P. Pautler, Consumer Protection, in INTERNATIONAL ENCYCLOPEDIA FOR THE SOCIAL SCIENCES 102-03 (2nd ed. 2008). One FTC Commissioner has analogized the legal overlap of consumer protection and competition to the wings of a house.
24. See T. Leary, Competition Law and Consumer Protection Law: Two Wings of the Same House, 72 ANTITRUST L.J. 1147-51 (2005). Other than being inanimate, the winged house is not a bad analogy. The wings are largely separate, but they meet in a central area that often involves some form of regulation or legal complication (e.g., occupational regulation, standard-setting organizations, regulated industries, etc). At a conceptual level, an understanding of markets is the foundation for the entire house, including each wing.
25. Armstrong discusses occupational regulation and restraints on advertising (supra note 2, at 117-18, 133-36 and n. 95, 96), as does Rubin (supra note 4, at 176-78).
26. M. Ohlhausen, Identifying, Challenging, and Assigning Political Responsibility for State Regulation Restricting Competition, 2(2) COMPETITION POL'Y INT'L 151-60 (Autumn 2006) describes challenges to entry restraints in wine distribution and real estate. A recent U.S. submission to the OECD describes efforts by the FTC and U.S. Department of Justice (DOJ) to alter agent activities that deter innovative service offerings in real estate service provision. See Federal Trade Commission, The Interface between Consumer Protection and Competition Policies, U.S. submission to OECD discussing U.S. Real Estate Markets, Mortgage Financing, and Real Estate Settlement Services, OECD Global Forum on Competition (Feb. 21-22, 2008), January 2008 DAF/COMP/GF/WD (2008)19, available at http://www.oecd.org/dataoecd/18/4/39915760.pdf.
27. On optometry, see R. Bond, J. Kwoka, J. Phelan, & I. Whitten, Effects of Restrictions on Advertising and Commercial Practice in the Professions: The Case of Optometry, Bureau of Economics Staff Report, Federal Trade Commission,Washington, DC (Sep. 1980). For a recent attorney advertising comment, see Federal Trade Commission, Comments to the Louisiana State Bar Association regarding attorney advertising and solicitation (Aug. 14, 2007).
28. N. Koppel, Objection! Funny Legal Ads Draw Censure, WALL ST. J., Feb. 7, 2008, at A-1, A-10.
29. For a description of the FTC's efforts to support many activities in the self-regulatory area, see FTC Chairman Deborah P. Majoras, Self-regulatory Organizations and the FTC, Speech before the Council of Better Business Bureaus (Apr. 11, 2005), available at http://www.ftc.gov/speeches/majoras/ 050411selfregorgs.pdf. See also FTC General Counsel D. Valentine, Industry Self Regulation and Antitrust Enforcement: An Evolving Relationship, Speech at the Seminar on New Developments in Antitrust Policy, Herzlia, Israel (May 24, 1998), available at http://www.ftc.gov/speeches/other/dvisraelspeech.shtm.
30. J. Lacko & J. Pappalardo, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment, Bureau of Economics Staff Report, Federal Trade Commission, Washington, DC (Feb. 2004).
31. Armstrong, supra note 2, 110-12, 119-21, 141. One significant difference is that if consumers are misled via "headline pricing", that problem could be offset by rivals who choose to disclose more or run counter-advertising. In the mandated disclosure case, private firm incentives cannot readily fix the regulation-induced problem. In any event, the correct policy to solve the problem would have been a disclosure about broker incentives (and lender incentives), not a disclosure about their compensation level.
32. Muris provides some additional examples of competition and consumer protection connections during the past 25 years. The importation of remedies from consumer protection to antitrust may be the most significant. T. Muris, The Interface of Competition and Consumer Protection, Presentation at the Fordham Corporate Law Institute's 29th Annual Conference on International Antitrust Law and Policy, New York (Oct. 31, 2002), available at http://www.ftc.gov/speeches/ muris/021031fordham.pdf.
33. Armstrong, Beales, and Rubin all appear to agree that the market can provide much of the needed consumer protection.
34. This is a theme in Paul Rubin's paper in this issue.
35. Saying that policy is affected by the underlying crosscurrents is not to say that everything is affected. For example, the authors of the DOJ and FTC's Horizontal Merger Guidelines in 1982, 1992, or 1997 were not actively using their knowledge of consumer protection principles. Similarly, the FTC's key consumer policy documents-the deception statement, unfairness statement, and advertising substantiation statement-were not likely impacted by "antitrust thinking," although all these documents were clearly affected by consideration of the process of market competition.