Rethinking Consumer Policy: Lessons learned and options for reform

CCP Conference 2021

A warm welcome to this year CCP annual conference! Our conference will be comprised of 5 online sessions over two days.

Day 1 (24th of June) consists of Session 1: New Thinking on the Theory and Evaluation of Consumer Policy, and Session 2: Implementing Fairness and Transparency.

Day 2 (25th of June) consists of Session 3: Consumer Policy as a Regulatory Instrument in the Digital World, Session 4: Keynote Speech by William Kovacic and Session 5: Panel Session Rethinking Consumer Policy: Options for Reform.

We will be blogging a summary for each session during each day. Follow us and look out for updates on Twitter @ccp_uea and LinkedIn https://www.linkedin.com/school/ccpuea/.

Our social media and blogging team is constructed from our excellent research active CCP doctoral students: Anush Ganesh, Israel Gottschalk, Lilian Klein and Carlos Vega; Senior Research Associate: David Deller and Research Associate Bryn Enstone.

Introducing the topic of this year’s conference: rethinking consumer policy

Consumer protection is in the policy spotlight like never before, with new digital regulation and proposals to revise consumer law. It is timely to take stock of what we have learned about the effectiveness of past consumer interventions, consider new challenges, and implications for policy developments. The conference will bring together academics from various disciplines, policymakers and practitioners to address these topical and difficult questions. The discussions should prove of interest for academics, policymakers and practitioners. At CCP we adopt a position of academic neutrality, and as such seek to present a balanced and informed position on the issues discussed.

Session 1: New Thinking on the Theory and Evaluation of Consumer Policy

CCP’s Morten Hviid chaired the session and introduced the speakers.

The session kicked off with Oren Bar-Gill using a theoretical framework to explore how even perfectly rational consumers can be manipulated by the way in which companies display information about products. A model involving products with multiple dimensions was constructed where consumers rationally decide to only consider information about a subset of product dimensions. He explained that this provides an opportunity for sellers to manipulate consumers and increase their profits by deciding only to disclose information about elements of a product that are positive. One example of this might be a company failing to highlight the sugar content of soft drinks.

Bar-Gill described two situations where product dimensions are either ‘Complimentary’ or ‘Substitutes’. In complimentary situations, significant consumer utility only exists where quality is high in all dimensions. Here sellers want to emphasize the high-quality dimension, and this is manipulative because it is harms consumers if one aspect of a product is low-quality. This behaviour of sellers can be addressed by regulators requiring disclosure of low-quality aspects of products.

However, Bar-Gill noted that the disclosure of low-quality product dimensions may itself be harmful when consumers consider information on a product’s high-quality dimensions to be more relevant. In effect, consumers are being directed to information of limited importance. This occurs in the case of substitutes where a product’s utility to a consumer is determined mainly by a single high quality attribute being present.

The presentation was rounded off by discussion of possible extensions to the model, including how different regulatory regimes can alter the incentives for sellers to add additional attributes to their products.

Next, Paul Heidhues presented a model to help explain markets where there appear to be large financial gains from switching supplier, but consumers frequently do not switch, such as retail energy markets. In these markets high prices arise even when supply side conditions are virtually ideal for competition. Heidhues also noted that in these models the size of switching costs required to explain non-switching are so large that it implies psychological switching costs need to be part of the explanation.

Central to Heidhues’ presentation was the notion that consumers procrastinate. In his model both a consumers’ initial selection of a supplier and their subsequent opportunities to switch to other providers are considered.

Procrastination implies that while consumers intend to switch in the future, they continually put off the act of switching when the future becomes the present. As a result, consumers fail to switch to better options after initially signing up with a particular firm and this means consumers exert little downward pressure on prices. While this is an existing result in the literature, Heidhues’ analysis went further by indicating that consumers often do not pick the best available offer even when they first select to consume a product. As such, there is limited pricing pressure even among ‘new’ consumers.

A further interesting finding reported by Heidhues was that an apparent increase in competition, in terms of more firms in the market or an increase in the frequency of opportunities to switch, can actually worsen the situation and raise prices. This is because more possibilities to switch increases the procrastination of consumers. Also, significantly, and in contrast to the standard industrial organisation literature, the offering of ‘introductory offers’ may not always be beneficial to consumers as consumers will choose the product with the largest introductory offer, but will then fail to switch to products with a lower long-term price.

Concluding the presentation, Heidhues suggested that the results of the model implied that more interventionist ‘managed switching’ may be required to address policy concerns.

In the third presentation David Laibson provided a cautionary note to policymakers about the effectiveness of using ‘nudge’ interventions based on behavioural economics to improve the final outcomes of consumers. While nudges can be very cost-effective policy interventions due to their low cost, the core of Laibson’s talk was that the beneficial results of ‘nudges’ when considered over the long-run may be much lower than when they are assessed in the short-run. This was highlighted with reference to an empirical study of auto-enrolment into pension saving schemes in the US and an experiment regarding minimum payment amounts for credit card balances in the UK.

In the case of pensions auto-enrolment, apparently high increases in enrolment rates may not lead to long-run increases in pension savings for two reasons. First, when leaving firms many employees withdraw the savings from their pension schemes. Second, over time many employees who were not auto-enrolled independently chose to start saving for their retirement; hence, over the long-term the increase in participation induced by auto-enrolment is smaller than it appears in the short-term. Laibson argued that to increase pension saving over the long-term ‘hard paternalism’ is required where the ability of individuals to withdraw money from pension schemes needs to be restricted.

In the study of minimum payments for credit cards, Laibson noted that while far fewer individuals paid off only the minimum amount on their credit card each month due to the nudge, this change only concerns an intermediate objective. Due to only a small increase in monthly debt repayments resulting from the nudge, the intervention had no effect on the final outcomes of concerns to policymakers, namely, total debt repayments, total debt or total credit card borrowing.

Rounding off the session, Kate Collyer discussed the points raised by the earlier presentations, in particular, relating them to recent policy developments in the UK, such as restrictions introduced by the Financial Conduct Authority on the ability of insurers to charge different prices for new and existing customers (a practice termed price walking).  

Session 2: Implementing Fairness and Transparency

The session was introduced and chaired by CCP’s Sally Broughton Micova.

The first presentation involved Bruce Lyons explaining the concept of ‘transactional fairness’ developed with Bob Sugden. Lyons started by noting that there is a lot of debate about different price and marketing practices, with growing public concern about ‘unfair’ pricing practices that have become common in consumer, particularly digital, markets. He argued that in response, regulators are struggling to use consumer law, and many view their response is unsatisfactory.

Lyons then explained their approach, this is underpinned by: (i) The Principle of Mutual Benefit and (ii) the Principle of Voluntary Market Transactions. The idea is to ensure that business practices are ethical and to make markets morally attractive, beyond efficiency reasons. Lyons discussed the application of these principles to practical consumer policy, explaining that consumers’ expectations of business practices can be context-dependent. This led to the idea of ‘normal expectations’, namely, what most consumers expect a seller’s behaviour to be in a particular context/market.

He explained that ‘transactional fairness’ is grounded on the ethical conception of a well-functioning market as a network of mutually beneficial cooperative interactions. Transactional fairness requires firms to act in such a way that consumers with normal expectations about pricing practices are able to understand the consequence of transacting with firms (No Deception) and are not hindered from terminating a relationship with the firm or from transacting with alternative sellers (No Hindrance). Additionally, transactional fairness requires firms to defend the rationale of their pricing practices publicly (Public Explanation).

Lyons emphasised that ‘transactional fairness’ is about a relationship between a firm and a consumer and that it is entirely consistent with large sections of existing consumer law. Transactional fairness is to be viewed as complementary to economic efficiency and distributional equity, and Lyons argued that it establishes clear principles with realistic information requirements for firms. In contrast, he explained that neoclassical and behavioural welfare economics are inadequate for consumer policy guidance with there being a mismatch between the principles of welfare economics in theory and the normative perspective of practices which are viewed as unfair. He concluded by stating that regulation based on their approach can help to restore public faith in markets.

In the second presentation Christine Reifa outlined core concepts from the book ‘Consumer Theories of Harm’, that she co-authored with Paolo Siciliani and Hariett Gamper. This book reflects on the concept on fairness in consumer markets and borrows the concept of theories of harm from competition law to apply it to consumer law. They argue that a more economic approach to consumer policy-making and consumer law enforcement would have benefits for consumers.

Reifa outlined a number of consumer theories of harm and emphasised that their approach is not a revolution but a natural evolution, which helps to correct the problems previous speakers highlighted. She explained the limitations of existing legal frameworks, in particular the reliance on the provision of information to consumers to solve harms, and the definition of the average consumer as being perfectly rational. She argued that it is an error to assume that competition can solve all problems for consumers and create fair markets.

Examples of consumer theories of harm were provided, with the four main ones being termed: The Scam, The Lemon, The Shock and the Subsidy. Reifa argued that current consumer policy tools may be imperfect, as they do not demand fairness by design, simply that businesses avoid particular unfair actions. In this view the onus should be put on the trader to behave fairly, rather than focusing on the consumer to be aware. She also stated that legislation can be re-interpreted to promote fair practices.

Regarding notions of ‘average’ consumers, she emphasised that to an average consumer it may not make sense to shop around, and this feeds on the belief that markets are not working in consumers’ favour. Privacy disclosure was given as an example where consumers disengaged and as such it was argued that average should not be viewed as meaning well-informed.

Reifa then discussed professional diligence, as a standard by which there is an expectation on firms to help consumers make choices with it being a duty for business to behave well rather than for consumers to be aware. She concluded by saying that fairness makes economic sense, since an obligation to trade fairly fosters competition and ensures markets that function well. While acknowledging criticisms of fairness as a complex concept, Reifa disagreed with this criticism since fairness is a well-known common law concept.

After this, Marshini Chetty introduced her presentation by emphasising that she is approaching the issues as a computer scientist. She presented two case studies of misleading online content and the current consumer protections in place to prevent users from being harmed in the US.

The first case study she presented was on ‘Dark Patterns’ on shopping websites. Chetty explained that this broadly involved steering and deceiving users to make choices they would not have made. This can be done by manipulating the information flow and modifying the ‘choice architecture’ that consumers face. The case of booking flights was given as an example. Chetty went on to discuss her study of shopping websites which found that 11% had some sort of dark pattern. The major takeaway from the study was the need to identify misleading online content to inform policy.

The second case study Chetty presented concerned disguised advertisements. She gave the example of influencers in YouTube videos. Chetty’s work identified the links that included an identifier for endorsers and that there is always an identifier, so that a payment can be directed to an influencer. As a result, this provides a way to identify which influencers are conducting affiliate marketing. The study also found that only a minority were disclosing that they were performing affiliate marketing.

Furthermore, she said that disclosures were not well understood and so they had created a tool called “AdIntuition’ to help people identify where affiliate marketing was taking place. As such, Chetty viewed the major takeaway for consumer protection legislation to be that the development of user facing tools can help users to identify misleading online content.

The session was concluded by the discussant Nathan Francis who noted that there can be tensions between fairness and economic efficiency, with price discrimination being a potential example. Nevertheless, he explained that there is considerable room for unfairness in online environments and that fairness is growing as a concern.

He explained how Ofcom recently published a fairness framework and has made efforts to make it easier to switch by requiring companies to inform consumers when their contracts end, something in the spirit of the no hindrance aspect of transactional fairness.

Equally Francis noted that there are risks to intervening, in particular, that an intervention may be ineffective and that interventions can have unintended consequences that are bad for consumers. Due to this he concluded by highlighting the importance of monitoring and evaluating interventions over both the short-term and long-term.

Session 3: Consumer Policy as a Regulatory Instrument in the Digital World

Wynne Lam of CCP introduced the topic of consumer policy as a regulatory instrument in the digital world by drawing out close links from the discussions held in the previous panels.

Danilo Montesi from the University of Bologna was the first speaker. His presentation began by discussing how digital platforms dominate markets by creating socio-technical ecosystems. He used the example of Amazon to substantiate this and explained how the firm creates a complete end to end service. He highlighted the central role that data collection plays and noted the different regulatory mechanisms that are currently available. He went on to suggest a new approach to deal with concentration problems in digital markets. This approach was to make use of ‘Middleware’, which is a software on top of a platform, to assist in helping users take control of information. He noted that the current challenge with respect to digital markets is to mix a technical and regulatory framework and concluded by stressing the importance of a coordinated approach between regulation and technical intervention.

Jan Kramer from the University of Passau spoke next and began his presentation by discussing the theories of harm in data driven markets. He noted that the harms to competition may consist of issues such as a lack of contestability, self-preferencing, data agglomeration and harming downstream competition. On the harms to innovation, he discussed the need to protect new markets and argued about innovation getting stifled by large digital platforms acquiring small entrants. He also noted that such acquisitions can also lead to efficiencies but that having other firms compete with the larger dominant firm would be overall more efficient. He discussed broad and deep data sharing, in particular, how to achieve data sharing that both protects legitimate business incentives and promotes competition, while also leading to benefits in terms of privacy. He discussed the principles that should be included in beneficial data sharing regulations, specifically that sharing should only be required in terms of raw data, secure and sufficiently anonymised data and data created as a by-product of services rather than central to their delivery. He concluded by stating that consumers need to take their rights into their own hands and that the current data portability measures in the GDPR are not that effective.

Fiona Scott Morton began her presentation by discussing the distinction between antitrust law and regulation and stated that the former is general in nature and involves ex-post enforcement, while the latter is more specific and is ex-ante in nature. She highlighted the need to combine ideas of behavioural economics with digital markets and emphasised the need for this to occur both in terms of antitrust and regulation. She discussed the different ways that consumers can be misled by online platforms citing examples of misleading advertising, unfair terms and conditions and ‘dark patterns’. She argued that the consumer experience needs to be improved by arguing that opting out of a service should be as easy as it is to opt in to one. She noted that there are currently no digital oriented laws in the US that deal directly with consumer protection, but noted the presence of laws such as the GDPR, the proposed Digital Markets Act and the Digital Services Act as being present in the EU and the UK. She discussed the development of antitrust in digital markets in the US by referencing cases involving Google and Facebook and stressed their importance. She concluded by saying that to improve the consumer experience and for competition to be more effective, consumer protection is vital.

Keynote: Bill Kovacic (GW Law)

Amelia Fletcher of CCP introduced the keynote speech by Bill Kovacic, noting that while he may be best known for his competition policy work, he has strong experience of consumer policy from his time at the US Federal Trade Commission (FTC). Kovacic’s presentation focussed on the lessons from the FTC’s introduction of a ‘Do Not Call Rule’ where consumers could opt-in to stop unwanted marketing phone calls reaching their homes. He explained how the introduction of the rule relied on a concept of ‘abusiveness’ that did not really rely on market power or economic harm, rather the harm was that marketing calls represented an unwanted intrusion into individuals’ home lives. He then went on to explain how proposals were considered from the perspective of technical feasibility, political risk and legal risk, with the decision to require consumers to ‘opt-in’ being related to legal precedent regarding when the state can block commercial communications. Kovacic explained how the policy was initially a great success with hundreds of millions of people signing up and there being broad public satisfaction with policy. However, the effectiveness of the policy was eroded over time as mobile telephony grew in importance and ‘robocalling’ made it technically more challenging to block unwanted calls. He concluded by stressing the importance of ongoing monitoring and evaluation of interventions, as well as the inclusion of technology specialists in agencies to understand how policies may need to evolve over time.

Panel Session: Rethinking Consumer Policy, Options for Reform

Following on from the keynote speech Kai-Uwe Kühn chaired a panel session discussing the options for reforming consumer policy. On the panel were: Sir Jonathan Faull KCMG, Amelia Fletcher, George Lusty, Agustín Reyna and Grant Saggers.

Kühn starts the panel discussion by suggesting it might be sensible to have a look back at what has been done in the past and what we know about how well things have worked. Lusty elaborates on how due to the pandemic, consumer protection issues have been tested acutely. He suggests that in this context, consumer law has done quite well; the CMA was able to achieve outcomes that protected consumers. The CMA uses partners to gather intelligence in real time about key areas of consumer detriment and how they can target their enforcement. Nevertheless, it is important to remember that scams in the offline world have also been problematic, not just those in the online world.

Kühn then asks about what has learned about interventions that don’t work very well such as disclosures that are very hard to follow. Reyna agrees that disclosures could communicated more effectively and that the enforcement of consumer law could be improved. Not all members of BEUC (The European Consumer Organisation) have the resources to handle many consumer protection issues. Fletcher follows up regarding disclosure noting that there has been a lot of ex-ante testing of information ‘nudges’ by regulators and that findings from behavioural economics suggest disclosures have limited benefits and can even make things worse. There is a need to use empirical assessments to make sure disclosures are effective and help consumers.

Kühn then asks if we need to think about other criteria such as fairness. Faull discusses how while issues on fairness are very important issues there has been perhaps limited progress in distinguishing between what is unfair and what is fair. He also notes that with greater liability placed on firms, firms are seeking greater vertical control of supply chains which can come into tension with competition law. Saggers then returns to talk about what works with experiments and the availability of data leading to exciting economic developments, but above all recent developments have highlighted that economists need to be humble about results. Sometimes exciting results disappear in alternative environments. Saggers is also concerned about the struggle to get see legal cases even for the most egregious abuses. 

Fletcher talks about the substitutability as well as the complementarity of consumer protection and competition law with the multiplicity of tools being useful when there are gaps in regimes. She also wonders whether work by Fiona Scott Morton can help with the issues of privacy disclosures, by having a default minimum privacy standard and a limited number of alternative privacy levels that consumers can choose between.

Kühn starts a discussion about the responsibility of firms as gatekeepers and asks if giving them this responsibility is reasonable or not. Lusty points out that this already has some basis in consumer law but some areas still need clarification.  The CMA has taken action against the trading of fake reviews by getting platforms agreeing to enforce their own usage terms to suppress harmful activities. Shifting the discussion to fake news, Kühn asks where whether it is appropriate for private social media platforms to decide on who to ban. Faull points out that the rules around print media and state involvement have taken centuries to evolve, there is still a lot of new thinking required before we can reach a consensus on regulating social media. Reyna notes that one problem with how we currently approach platform regulation is that free speech concerns and consumer protection are put in the same basket. These are different concerns and are likely to need different types of solutions.

Kühn then directs the panel to the discuss ‘dark patterns’, asking how large the effects are and the direction of regulatory interventions. Fletcher explains that the strongest evidence coming from competition cases is the power of ‘default’ effects. She notes that there is growing evidence on the important of choice architecture in online environments, but highlights no one has really opined on whether the boundary is between extreme dark patterns that require action and subtler forms that are acceptable.

Saggers then wondered how regulators can handle what is massive problem regarding dark patterns. Perhaps there is a need for other bodies/actors to take on some of the task. Lusty admits it is a big job but suggests that the CMA systematically works through sectors and that partnerships can help, citing work with the Gambling Commission in the gambling sector. Similarly, international partnerships are such as when UK, Dutch and Norwegian agencies took joint action against Google regarding privacy provisions when downloading apps.

The conversation then turned to whether courts handle some of the load. Saggers thought the court system has an important to role to play. Ideally, if harm has occurred, we would want consumers to receive compensation. Lusty noted that while class action litigation can discipline firms, it has taken off slowly and that it might be worthwhile to focus on whether changes to the public enforcement regime could help. Faull says that law, judges and the courts can be creative to address new challenges but this process is likely to be too slow for current purposes. Also, there is the question of how to achieve legal certainty so that market participants know the standards they need to meet. Reyna also notes that collective redress is important, but challenging, because it often concerns small harms to individuals, but the number of people affected is large. Kühn concludes by highlighting that this raises issues around the funding of class actions, before thanking the panellists and closing the conference.

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