Static versus dynamic disclosures, and how not to judge their success or failure

Washington Law Review

Volumn 88, Issue 2, 2013, Pages 333-384

  Craswell, Richard ^a  

^a STANFORD LAW SCHOOL   (United States)

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EID: 84879963522     PISSN: 00430617     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (131)

1. Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure, 159 U. PA. L. REV. 647 (2011).
2. Id. at 649.
3. Id. at 652.
4. ARCHON FUNG, MARY GRAHAM & DAVID K. WEIL, FULL DISCLOSURE: THE POLITICS AND PERILS OF TRANSPARENCY POLICIES (2007).
5. This book is cited only once, and briefly, by Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 679 n.166.
6. Jennifer J. Argo & Kelly J. Main, Meta-Analyses of the Effectiveness of Warning Labels, 23 J. PUB. POL'Y & MARKETING 193 (2004).
7. Anthony D. Cox, Dena Cox & Gregory Zimet, Understanding Consumer Response to Product Risk Information, 70 J. MARKETING 79 (2006).
8. Eli P. Cox III, Michael S. Wogalter, Sara L. Stokes & Elizabeth J. Tipton Murff, Do Product Warnings Increase Safe Behavior? A Meta-Analysis, 16 J. PUB. POL'Y & MARKETING 195 (1997).
9. Baruch Fischhoff, Donna Riley, Daniel C. Kovacs & Mitchell Small, What Information Belongs in a Warning?, 15 PSYCHOL. & MARKETING 663 (1998).
10. David W. Stewart & Ingrid M. Martin, Intended and Unintended Consequences of Warning Messages: A Review and Synthesis of Empirical Research, 13 J. PUB. POL'Y & MARKETING 15 (1994).
11. William L. Wilkie, Affirmative Disclosure at the FTC: Objectives for the Remedy and Outcomes of Past Orders, 4 J. PUB. POL'Y & MARKETING 91 (1985).
12. Howard Beales, Richard Craswell & Steven Salop, The Efficient Regulation of Consumer Information, 24 J.L. & ECON. 491, 491 (1981).
13. If my assertion in the text is accurate, no lawyer or law student is likely to need this citation, but I supply it anyway: Raffles v. Wichelhaus, (1864) 159 Eng. Rep. 375 (Ex.).
14. See, e.g., Howard Beales et al., supra note 6.
15. Richard Craswell, Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere, 92 VA. L. REV. 565 (2006).
16. Richard Craswell, "Compared to What?" The Use of Control Ads in Deceptive Advertising Litigation, 65 ANTITRUST L.J. 757 (1997) [hereinafter Craswell, Control Ads].
17. Richard Craswell, Regulating Deceptive Advertising: The Role of Cost-Benefit Analysis, 64 S. CAL. L. REV. 549 (1991) [hereinafter Craswell, Cost-Benefit Analysis].
18. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 678-79 ("We could go on We could also point to some moderate successes of disclosure regimes, particularly those that rely on rating systems. But enough. Let us move on") (footnote omitted).
19. Id. at 651.
20. Id. ("Not only does... mandated disclosure regularly fail[] in practice, but its failure is inevitable") (emphasis added).
21. But see id. at 679 (disclosure "regularly-though not inevitably" fails) (emphasis added).
22. Id. at 665 (emphasis added).
23. Id. at 651 (emphasis added).
24. E.g., id. at 649, 729, 746.
25. Id. at 650 (numbers added).
26. ij-to designate the belief that some particular consumer i held about the safety produced by some particular seller j. For ease of reading, I have omitted those superscripts here.
27. LEO TOLSTOY, ANNA KARENINA 3 (Leonard J. Kent & Nina Berberova eds., Modern Library 1993) (1918) (my paraphrase).
28. This aspect of the model draws heavily on Michael Spence, Consumer Misperceptions, Product Failure, and Producer Liability, 44 REV. ECON. STUD. 561 (1977).
29. For other theoretical models, each making a different assumption about consumer beliefs, see for example
30. George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488 (1970).
31. Andrew F. Daughety & Jennifer F. Reinganum, Products Liability, Signaling and Disclosure, 164 J. INSTITUTIONAL & THEORETICAL ECON. 106 (2008).
32. Xavier Gabaix & David Laibson, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q.J. ECON. 505 (2006).
33. Professor Akerlof's model of the "market for lemons" is probably the one that is best known in the legal academy. The Appendix discusses some of the similarities between that model and the one I use here.
34. For earlier discussions of this point, see Howard Beales, Richard Craswell & Steven Salop, supra note 6, at 586-87
35. Alan Schwartz, Proposals for Products Liability Reform: A Theoretical Synthesis, 97 YALE L.J. 353, 374-78 (1988).
36. Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: The Problem of Market Manipulation, 74 N.Y.U. L. REV. 630, 710-14 (1999). For a formal mathematical model, see the Appendix.
37. Disclosures in this latter category are sometimes referred to as "corrective advertising." Studies of particular instances-which typically show small but non-zero effects on consumer beliefs-include
38. Gary M. Armstrong, Metin N. Gurol & Frederick A. Russ, A Longitudinal Evaluation of the Listerine Corrective Advertising Campaign, 2 J. PUB. POL'Y & MARKETING 16 (1983).
39. Peter R. Darke, Laurence Ashworth & Robin J.B. Ritchie, Damage from Corrective Advertising: Causes and Cures, 72 J. MARKETING 81 (2008).
40. Michael B. Mazis, FTC. Novartis: The Return of Corrective Advertising?, 20 J. PUB. POL'Y & MARKETING 114 (2001).
41. Andrea Heintz Tangari, Jeremy Kees, J. Craig Andrews & Scot Burton, Can Corrective Ad Statements Based on U.S. v. Philip Morris USA Inc. Affect Consumer Beliefs About Smoking?, 29 J. PUB. POL'Y & MARKETING 153 (2010).
42. William L. Wilkie, Dennis L. McNeill & Michael B. Mazis, Marketing's "Scarlet Letter": The Theory and Practice of Corrective Advertising, 48 J. MARKETING 11 (1984).
43. For an example of one such study, see infra Section IV.A.
44. See for example the exchange between the experts who testified on each side of the Federal Trade Commission's suit In re Kraft, Inc., 114 F.T.C. 40 (1991).
45. Jacob Jacoby & George J. Szybillo, Consumer Research in FTC versus Kraft: A Case of Heads We Win, Tails You Lose, 14 J. PUB. POL'Y & MARKETING 1 (1995).
46. David W. Stewart, Deception, Materiality and Survey Research: Some Lessons from Kraft, 14 J. PUB. POL'Y & MARKETING 15 (1995).
47. Seymour Sudman, When Experts Disagree: Comments on the Articles by Jacoby and Szybillo and Stewart, 14 J. PUB. POL'Y & MARKETING 29 (1995).
48. Other useful discussions include Debra K. Owen & Joyce E. Plyler, The Role of Empirical Evidence in the Regulation of Advertising, 10 J. PUB. POL'Y & MARKETING 1 (1991).
49. Janis K. Pappalardo, The Role of Consumer Research in Evaluating Deception: An Economist's Perspective, 65 ANTITRUST L.J. 793 (1997).
50. For further discussion of this trade-off, see the exchange between Ivan L. Preston & Jef L. Richards, Consumer Miscomprehension and Deceptive Advertising: A Response to Professor Craswell, 68 B.U. L. REV. 431 (1988).
51. Craswell R., Cost-Benefit, supra note 8, at 567-72.
52. Cornelia Pechmann, Do Consumers Overgeneralize One-Sided Comparative Price Claims, and Are More Stringent Regulations Needed?, 33 J. MARKETING RES. 150 (1966).
53. See especially Craswell R., Cost-Benefit Analysis, supra note 8.
54. Craswell R., Control Ads, supra note 8.
55. For an argument that this is how the Federal Trade Commission has often exercised its own authority over advertising disclosures-though sometimes without explicitly being aware it was doing so-see
56. Richard Craswell, Cost-Benefit Analysis, supra note 8.
57. For a more extended discussion, including other versions of the "n percent problem" that are functionally similar to the one discussed here, see
58. Ivan L. Preston, The Definition of Deceptiveness in Advertising and Other Commercial Speech, 39 CATH. U. L. REV. 1035, 1044-46 (1990).
59. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 666.
60. Id. at 673.
61. Id. at 676. I address the related question of whether consumers' ability to make such calculations is even necessary for a disclosure to work in notes 50-53 and the accompanying text.
62. FTC Trade Regulation Rule: Credit Practices, 49 Fed. Reg. 7740-01, 7745-47 (Mar. 1, 1984) (Statement of Basis and Purpose).
63. Id. at 7747.
64. Compare Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 681 (quoting another FTC decision as evidence that lawmakers have bought into "[t]he more-information-is-better mantra").
65. Ginger Zhe Jin & Phillip Leslie, The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards, 118 Q.J. ECON. 409 (2003).
66. Professors Omri Ben-Shahar & Carl E. Schneider discuss this example briefly and interpret it as a case of disclosure succeeding at its goal. Ben-Shahar & Schneider, supra note 1, at 743.
67. Clifford Winston, The Efficacy of Information Policy: A Review of Archon Fung, Mary Graham, and David Weil's "Full Disclosure: The Perils and Promise of Transparency," 46 J. ECON. LITERATURE 704 (2008).
68. Daniel E. Ho, Fudging the Nudge: Information Disclosure and Restaurant Grading, 122 YALE L.J. 574 (2012).
69. I discuss Professor Ho's study at more length infra in Section V.D.
70. For the most recent ratings, see U.S. Department of Energy and U.S. Environmental Protection Agency, Model Year 2013 Fuel Economy Guide (2013).
71. See Model Year 2013 Fuel Economy Guide (presenting figures for fuel economy in the model year 2013) cited supra in note 43.
72. U.S. Department of Energy & U.S. Environmental Protection Agency, Model Year 1999 Fuel Economy Guide (presenting figures for fuel economy in the model year 1999). For data from earlier years going all the way back to 1978.
73. see U.S. Dep't of Energy, Download Fuel Economy Data, FUELECONOMY.GOV, http://www.fueleconomy.gov/feg/download.shtml (last visited May 20, 2013) (providing links to data from earlier years going back to 1978).
74. For an overview of the long and colorful history of tobacco regulation, see SUSAN WAGNER, Cigarette Country: Tobacco In American History And Politics (1971).
75. The specific disclosure issues that I discuss in the text are described in more detail in John E. Calfee, Cigarette Advertising, Health Information, and Regulation Before 1970 (Fed. Trade Comm'n Bureau of Econ., Working Paper No. 134, 1985).
76. John E. Calfee, The Ghost of Cigarette Advertising Past, REGULATION, Nov./Dec. 1986, at 35.
77. Robert McAliffe, The FTC and the Effectiveness of Cigarette Advertising Regulations, 7 J. PUB. POL'Y & MARKETING 49 (1988).
78. See for example the two studies by John E. Calfee supra cited in note 45.
79. Pub. L. No. 101-535, 104 Stat. 2353 (codified as amended at 21 U.S.C. § 343-1 (2006)).
80. Alan Mathios, The Impact of Mandatory Disclosure Laws on Product Choices: An Analysis of the Salad Dressing Market, 43 J. L. & ECON. 651 (2000).
81. This disclosure program was described in the text supra at note 48.
82. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 675.
83. Id. at 675-76 (footnotes omitted).
84. Note that each of the studies cited by Professors Ben-Shahar and Schneider used experimental techniques, with consumer responses to surveys as their dependent variable. As discussed in Section IV.A, this is a perfectly appropriate method for evaluating the effects of static disclosures.
85. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 734.
86. Mathios A., supra note 48.
87. See sources cited supra note 45.
88. See sources cited supra note 45.
89. 49 U.S.C. § 32902 (Supp. V. 2011).
90. 26 U.S.C. § 4064 (2006).
91. I discuss this distinction at more length in the following subsection.
92. See 49 U.S.C. § 32908(b)(1) (2006).
93. See Alan Mathios, supra note 48.
94. See supra text accompanying notes 57-59.
95. I will mention in passing that, historically, the low-tar cigarette manufacturers (who emphasize tar and nicotine ratings in their advertising) have usually been fringe firms or new entrants who were challenging the larger and more established tobacco companies (whose advertising usually ran more to beautiful women, rugged cowboys, or cool mountain lakes).
96. Calfee J. E., supra note 45.
97. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 738 (predicting that the fixed costs of complying with disclosure laws will "hurt[] small companies trying to enter and compete in the market").
98. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 686-91.
99. Id. at 719-29.
100. For more extended discussions of this point, see
101. Beales H. et al., supra note 6, at 501-03
102. Fung A. et al., supra note 4, at 30-33.
103. Mathios H., supra note 48.
104. For more extensive discussions of the "public good" aspect of many disclosures, see
105. Beales H. et al., supra note 6, at 503-05.
106. Fung A. et al., supra note 4, at 30-33.
107. For a recent allegation that Hyundai has in fact misstated its mpg ratings, see
108. Harvey Rosenfield, Hyundai - False Advertising of Miles Per Gallon (MPG), CONSUMER WATCHDOG, http://www.consumerwatchdog.org/case/hyundai-false-advertising-miles-gallon-mpg (last visited May 10, 2013).
109. For further discussions of each of these possibilities, see Beales H. et al., supra note 6, at 521-31.
110. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 678-79, 743-45.
111. A similar conclusion was reached by Fung A. et al., supra note 4.
112. See supra text accompanying note 43.
113. John E. Calfee, supra note 45.
114. An alternative hypothesis is that the established cigarette companies were beginning to lose market share to the smaller, low-tar companies, so the established firms were happy to have comparative tar and nicotine advertising prohibited.
115. See supra section V.A.2.
116. Ho, supra note 42.
117. Ginger Zhe Jin & Phillip Leslie, supra note 40, at 435-36.
118. Ho, supra note 42, at 645.
119. Note, too, that restaurants that get a good grade in New York do not generally build advertising campaigns around that fact, the way sellers of low-tar cigarettes or high-mileage automobiles have done. In terms of the discussion supra in section V.A.4, New York's restaurant grades have failed to achieve GAD status.
120. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 742 ("That is too large a question to squeeze into the compass of this Article.").
121. Id. at 679-80.
122. Id. at 677.
123. I will set aside the possibility that some people might prefer to consume whatever fat they permit themselves in the form of, say, ice cream rather than salad oil.
124. Omri Ben-Shahar & Carl E. Schneider, supra note 1, at 679.
125. H.L. Mencken, The Politician, in PREJUDICES: FOURTH, FIFTH, AND SIXTH SERIES 72, 75 (1955).
126. Michael Spence, Consumer Misperceptions, Product Failure, and Producer Liability, 44 REV. ECON. STUD. 561 (1977).
127. It is also similar to one part of Steven Shavell's model of tort rules-specifically, when he models the case where (1) sellers are not liable for injuries their customers suffer from product defects; (2) customers are less than perfectly informed about the risk of a defect; and (3) customers cannot themselves affect the probability of a defect, except by altering the quantity of goods that they purchase.
128. Steven Shavell, Strict Liability Versus Negligence, 9 J. LEGAL STUD. 1, 12-17 (1980).
129. In the torts literature, this corresponds to what is sometimes called the "level of activity" effect.
130. See Steven Shavell, supra note 85.
131. George A. Akerlof, supra note 16.