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Student Blogger - The Myths of Consumer Protection Law

Update: Audio of this talk is now available.

Professor Omri Ben-Shahar spoke on the "Myths of Consumer Protection" at this year?s annual Ronald H. Coase lecture for first year law students. Ben-Shahar discussed why he believes the modern consumer protection movement is largely misguided. Consumer advocates cite three things that consumers need: information about products, access to courts, and remedies for wrongs done to them. In the eyes of the consumer advocate, a consumer cannot compete with large corporations without these three things. It would be David versus Goliath; and Goliath would always win.

Myth #1: Consumers will be better off if they have more information

Warning labels are on everything. You can?t install a piece of software or use a web site without checking some box guaranteeing that you have read the Terms of Service. Do these forms of disclosure benefit consumers?

Ben-Shahar believes not. Disclosures of information are often technical and hard to digest. People do not want to spend the time to read these disclosures. In a study of online viewing habits, 1/1000 people actually read a site?s Terms of Service, and that single curious individual only glanced at the complicated contract for an average of forty seconds?perhaps just a misclick.

People would rather just be told if a product is ?good.? They do not have enough time to digest technical information on all aspects of a product. A comparative rating service (for example, Zagat or Consumer?s Digest) is likely to be much more useful to a consumer. Unfortunately, mandatory disclosure laws do not and cannot facilitate this information. Mandatory disclosure laws require disclosure of specific facts and cannot disseminate the more subjective determinations desired by consumers. Too much mandatory disclosure may even be harmful by desensitizing consumers to warnings that may be helpful.

Disclosure may be useful to the extent that these rating services, or other trusted sources, rely on that information. However, it?s not clear that the disclosure laws would even benefit these sources. After all, these sources specialize in collecting and digesting information. They do not require disclosure because they get the information in other ways.

Myth #2: Consumers need access to courts

Many boilerplate licenses?standard contract terms that are often reused?require mandatory arbitration or place the forum to settle abuses far away. These provisions make litigation an infeasible choice. The consumer protection advocates believe everyone deserves their day in court, making these types of contracts unenforceable. But even if we had broad freedoms to sue, would it help us?

If everyone had the freedom to sue, some would exercise that right and others would not. The people exercising their right to sue for inadequate consumer products would raise the products? price. People who do not utilize their right to sue would have to pay this higher price, in effect subsidizing the litigious group.

It seems intuitive that only people who are informed of their legal rights will exercise them. Those that are informed would likely tend to be the affluent and wealthy users. Thus, instead of helping the class of people that consumer advocacy is most protective of?uninformed and poor consumers?broad legal rights serve as a subsidy from the have-nots to the haves.

On the other hand, legal rights to sue for inadequate products may deter businesses from pursuing illegitimate tactics. This would benefit all consumers. But this assumes that litigation is a good mechanism to distinguish the unfair and deceitful practices. Many observers believe that the outcomes of consumer protection suits are impossible to predict, undermining any desirable deterrent effect.

Myth #3: Consumers need special remedies for these suits to be worthwhile

Individual suits are probably not worth that much money because the underlying products are not worth that much. To even make litigation an option, consumer protection laws may have to provide extra damages (treble damages, fixed civil damages, etc).

But what if we went the other way? What if, instead of increasing legal sanction, we were to eliminate them altogether? If consumer have no monetary recourse against businesses, would things be worse? Not necessarily, claims Ben-Shahar. There are other ways to protect the integrity of the consumer bargain. For one, consumers can insure against the loss of the benefit of the bargain, through various intermediaries (like Square Trade) and even through insurance companies. Moreover, reputation can do much of the work. A typical person that feels aggrieved over their treatment by a company would share their experience with others. They would spread the word that the company does not provide a good product or service to consumers, so that other consumers will not make the same mistake. This harms the company?s reputation and may have a greater effect on the company?s behavior than a lawsuit would. From a corporation?s perspective it?s better to refund one customer who complains than to lose two future customers due to word-of-mouth.

Extra damages for consumer protection law violations would shift resources from one type of enforcement (reputation) to another (litigation). If reputation is a greater deterrent against unsavory corporate practices, which seems plausible, then more litigation is not a good thing. Reputation also seems more effective because it can deter companies from making poor quality products (relative to their price), whereas a law suit based on the claim that ?the product wasn?t worth what I paid? probably won?t succeed.

Full post as published by The University of Chicago Law School Faculty Blog on February 26, 2009 (boomark / email).