Protecting Consumers

1. Protecting Consumers Kevin Hinde

2. Introduction • Examines the policy framework within the UK and EC that focuses on controlling the worse excesses of rogue trading. • Explores two problems faced by consumers and reputable traders alike; adverse selection and moral hazard. • Briefly considers the role of self-regulation as a mechanism for addressing the problem and considers alternatives

3. Consumer Protection in Europe • The European Commission • DGXXIV • Article 153 • The UK • Various government departments • Local government • Consumer Organisations

4. Impact of Consumer Complaints

6. Consumer Detriment • OFT has tried to capture the loss in consumer surplus • ’consumer detriment’ in the UK totaled £8.3 billion per annum, equivalent to 1.5% of annual household consumer expenditure. • approximately £180 per adult every year and approached 1% of Gross Domestic Product • an underestimate?

7. Explaining Consumer Complaints • Most markets work well • Frequent transactions and few resources tied up with the exchange process. • However, • Adverse Selection • Moral Hazard

8. Adverse Selection • Defined as a process by which an undesirable population of buyers or sellers with an information bias are more likely to participate in voluntary exchange. • In this instance the ‘undesirable population’ are sellers (‘cowboys’) and they are attracted to the market in general before any transaction has taken place because of the potential returns.

9. Adverse Selection • Double Glazing Example • 75 % chance of high quality service • 25% chance of poor quality service • High quality costs £2600 • Low Quality costs £1800 • Expected Value • (0.75 x £2600) + (0.25 x £1800) = £2400 • Market will not perform efficiently – it may even fail to operate altogether!

10. Moral Hazard • An ex post contractual problem that may result because participants to the exchange process have information that allows them to act in an opportunistic manner once the transaction has been entered into. • Double Glazing example. Customer chooses a supplier, pays over a deposit but once ‘locked in’ to the transaction supplier may ‘act with guile’.

11. Overcoming the problem • Contracts • Warranties, guarantees and insurance • Brands • Self Regulation • Signalling and Screening • Problems of Self Regulation • Screening costs • Cartels • Profusion of Institutes • Credibility

12. Self Regulation versus Statutory Regulation • Doyle(1997) notes that self regulation is relevant where • Organisational Structures are simple • Competition is vigorous • Goods and services are well defined • Information is largely in the public domain • Statutory Regulation is required where • Structures are complex hierarchies, including transnational operations • Goods and services are complex such that information asymmetries may exist • A ‘two-tiered’ approach is used in many industries, i.e. the law is used as a ‘weapon of last resort’.

13. Some web references • Vickers J (2003) Economics for Consumer Policy, British Academy Keynes Lecture, OFT Speech, 29th October 2003 (You don’t need to know the model in the appendix). • Self Regulation and statutory Regulation, Business Strategy Review, vol. 8, no.3, 35-42, Summer. Available via the Library’s Electronic Journal Gateway.