Abstract
The question concerning when a governmental intervention in the market system is justified has occupied economists from the very beginning and has been a controversial discussion topic for just as long. Against this background, with respect to modern consumer policy, which still represents a relatively young field in the theory of economic policy, it is vital to find sound economic reasons for governmental regulations in order to protect consumers. Therefore, the article attempts to assess what the various economic literatures have added to our understanding of good consumer policy. For this reason, those policy implications that might flow from different theoretical approaches in order to broaden the foundation of an economic justification for consumer policy will be analysed. For this purpose, the consumer policy implications of the Economics of Information will be described, including a denomination of some certain problems all of which are not covered satisfactorily by this approach. Subsequently and in order to amend the informational economics framework, further economical approaches from New Institutional Economics, Behavioural Economics as well as Behavioural Consumer Research, which provide a complementary analysis of consumer behaviour in consideration of the respective decision-making situations and determining constraints (formal and informal rules, cognitive and emotional boundaries), will be discussed comparatively with respect to their consumer policy implications.
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Notes
The categorization of goods according to their information effort in terms of search and experience goods originally goes back to Nelson (1970, 1974) and was added to by Darby and Karni (1973) concerning the category of credence goods. For an overview of informational economic typing of good properties, see Weiber and Adler (1995). For an enlargement and a more differentiated analysis of these three categories of goods see also Klein (1998) as well as Girard (2003).
Following Tirole (1990, p. 106), it is to be sure that most goods cannot be classified in this simple manner because they possess attributes that are learned before purchase, after purchase, or never. But he also declares that this classification is quite useful for analysis: While for search goods, the main issue is product selection (quality, product diversity), for experience goods, the main issue is information, and credence goods face the informational issue with vengeance.
Following Beales et al. (1981, p. 502), the economic incentive for consumers to gather information is strong: Increases in the efficiency of purchase decisions made are equivalent to increases in real income, and, given the diversity of choices available in a modern (market) economy, improved choices can lead to a large gain.
For this Wein (2001, p. 83) quotes the arrow paradox: “[I]nformation can only be sold by full disclosure, and for disclosed information nobody would be willing to pay anything.”
Relating to Beales et al. (1981, p. 506), competitors may have an insufficient incentive to counter false or limited information, for at least two reasons: (1) Competitors may share the same negative attribute (for example, as with the health hazards of cigarettes). (2) In a competitive market, the increased patronage from the corrected consumer beliefs must be shared with other competitors, leading to a free-rider problem.
See, for example, Tirole (1990, pp. 109–110) who did additionally recommend occupational licensing and certification, or safety regulations. See also Leland (1979) who examines the economic effects of (minimum) quality standards. Shapiro (1986) examines occupational licensing and certification. He shows that both governmental regulations benefit only consumers who value quality of goods and services highly at the expense of those who do not. This result can also be applied to quality standards which harm those consumers who want to pay less for a lower quality as regulated.
Following the theory of exploitation, the consumer is powerlessly exposed to the strategies of the corporation in the ramifications of the transition from competition capitalism to monopoly capitalism due to power imbalances (Schäfer 1998, p. 559). Afterwards the consumer has absolutely no influence on the quality and characteristics of the products as well as the contract conditions. According to the “theory of manipulation,” which was derived from this, the consumers are, on the contrary, at the mercy of the companies—weak-willed and easy to manipulate. Within the boundaries of consumer protection, the primary goal should consequently be the dismantling of monopolistic and oligopolistic market structures oriented to the model of complete competition. For the theory of exploitation, also see Galbraith (1967).
Accordingly, Shapiro (1983, p. 527) also demonstrates that consumer protection “would be unnecessary in a world of perfect information.” It should be noted that some contributions to the Economics of Information are characterized by a broader analytical perspective as mentioned here. However, these contributions can largely be located in the intersection between the Economics of Information and other approaches, namely the Institutional Economics as well as Behavioural Economics both of which are subject matter of the following chapters.
High quality information in small quantities can be accordingly more effective than an excess of this good. By contrast, a flood of information or information of a lesser quality leads for their part to market failure. Concerning the phenomenon of information overload, see initially Jacoby et al. (1974) as well as Russo (1974).
To clarify the distinction between personal involvement and the marginal benefits of search for information, it can be stated that the former term indicates the degree of intrinsic motivation and ability to be basically interested in searching for additional information irrespective from whether potential marginal benefits exists or not. Thus, the term “personal involvement” represents the whole psychological attitude and internal frame of mind of a consumer in a certain (purchase) situation.
In turn, mechanism design has many important applications throughout economics. The design of rules for voting procedures, the writing of contracts among parties who will come to have private information, and the construction of institutional procedures for deciding upon public projects or environmental standards are all examples. See for more details Mas-Colell et al. (1995, pp. 857–859).
This also perhaps applies to the presumption of an endless time horizon as well as the assumption that the consumers are extensively informed about the actual misconduct of the producers (agents).
Such consumer’ misperceptions are mentioned too in informational economic approaches. For example, Spence (1977) assumes that consumers systematically overestimate the probability that the product will not fail. The producer, who has rational expectations, then gains from offering a low warranty in exchange for a low price. The consumers are willing to accept this arrangement, because they wrongly perceive the probability of failure as low. In turn, this low warranty induces the producer to undersupply reliability. See also Shapiro (1982). With respect to such misperceptions, informational and institutional economic approaches differ in so far as the last-mentioned theories are able to provide an explanation of existing misperceptions while the former ones can only declare them without further reasoning. In addition, Tirole (1990, p. 114) points out that informational economics approaches usually assume that consumers form their expectation rationally. Even though they may not be fully informed, they exhibit no systematic bias in their predictions. Approaches, which deviate from that assumption, are leaving the “common ground” of Informational Economics.
See, for example, Shafir( 2007) who reviews some fundamental insights from behavioural approaches in order to consider their implications for the design and implementation of economic policy. A behavioural perspective, it is argued, can help make sense of what might otherwise be seen as economic ‘puzzles’ in the behaviour of consumers. In addition, Lazear( 2000) sees Behavioural Economics as an important complement to conventional economics rather than a competitor or replacement of it. He states that, in particular, its reliance on psychological experiments has proved useful in identifying particular behavioural patterns.
The criticism of the theory of rational behaviour suffices here partly until one determines that their assumption of a rational decision maker goes beyond the consumer behaviour at the expense of real assumptions and that their worth can therefore at best be marginal for practical consumer policy considerations. See Korobkin and Ulen (2000, p. 1073) or Tversky and Kahneman (1986, p. 286).
Following Camerer et al. (2003, p. 1254), Behavioural Economics also show that consumers often overact to highly salient, rare events, and that they are surprisingly risk adverse for small gambles that pose the chance of a loss. Extended warranties offered by suppliers capitalize on exactly these patterns of behaviour. Referring to the policy implications which might flow from this assessment, see critically Field (2007, pp. 12–13).
To accentuate the difference between informational and behavioural economic approaches, following Mc Auley (2007, pp. 8–10), consumer detriments resulting from imperfect information can be separated from those that are resulting from behavioural biases.
From the viewpoint of Behavioural Economics, this behaviour leads to the effect that “buying prices will be significantly lower than selling prices“Kahneman and Tversky (1984, p. 13), because “the value of a good to an individual appears to be higher when the good is viewed as something that could be lost or given up than when the same good is evaluated as a potential gain” Kahneman (2003, p. 1457).
In general, from a behavioural economic view, it is of importance for addiction behaviour that the affected actors underestimate “the power of such visceral cravings before they occur” Korobkin and Ulen (2000, p. 1117). For the phenomenon of shopping addiction see representatively the study from Neuner et al. (2005). Subsequently, amongst other things a growing complexity of the consume world, a society becoming more aesthetically oriented, and the increasing demands of consumer credits and credit cards—connected to the changed perception of and attitude towards debt and indebtedness—count as key factors, which lead to this behaviour.
Additionally, Mc Auley (2007, p. 12) states that economic actors do not rationally weigh up present against future benefits and costs. Rather they put to much weight on the immediate. This misevaluation of future benefits and costs, for example, is manifested in outcomes such as low retirement savings in the absence of compulsion.
Impulsive purchase decisions come about especially when distinct needs (at least latent) are available. The consumer is strongly stimulated through stimuli and no situational restraints damage the spontaneous, cognitively lowly controlled purchase decision (Weinberg 1981, p. 14).
Following Mulholland (2007, p. 16), it is worthwhile to note that the debate whether consumers are getting ‘overloaded’ with too much information predates the behavioural economics literature, going back at least to the 1970s. See as well for an early discussion of the problem of informational overload Rudd (1983, pp. 465–467).
Because it does not only concern the theoretical considerations without a mentionable reference to consumer policy practice, when it comes to these suggestions, it is clear that especially within consumer policy on an EU level, these suggestions have already found their consideration in corresponding directives. See here for the directive 97/7/EG of the European Parliament and the Council (1997) from May 20th, 1997 about consumer protection during contract closures in distant selling. See also the directive 2002/29/EG of the European Parliament and the Council (2005) from May 11th, 2005 about dishonest business practices between businesses and consumers and for the modification of the directive 84/450/EWG of the Council, the directive 97/7/EG and 2002/65/EG of the European Parliament and the Council as well as the ordinance (EG) Nr. 2006/2004 of the European Parliament and Council.
Concerning this matter, Field (2007, pp. 11–12) criticises that such an argumentation seems to ignore, however, the other perfectly reasonable explanation for this observed behaviour, namely that consumers continue to buy the product, perfectly cognizant of the unfair terms, but simply valuing other terms of the contract beyond these unfair terms.
The harming of the consumer’s sovereignty is here caused “by forcing, or preventing, choices fort he individual’s own good, much as when parents limit their children’s freedom to skip school or eat candy for dinner” Camerer et al. (2003, p. 1211). Within the boundaries of public finance, such governmental market interventions have so far be discussed from the economic view of the controversial concept of merit goods. See Musgrave (1959, 1996).
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Rischkowsky, F., Döring, T. Consumer Policy in a Market Economy Considerations from the Perspective of the Economics of Information, the New Institutional Economics as well as Behavioural Economics. J Consum Policy 31, 285–313 (2008). https://doi.org/10.1007/s10603-008-9076-3
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DOI: https://doi.org/10.1007/s10603-008-9076-3