Protecting Consumers

Kevin Hinde

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

Consumer Protection in EuropeThe European Commission

DGXXIV Article 153

The UK Various government departments Local government

Consumer Organisations

Impact of Consumer Complaints

Summary of Consumer Complaints in the UK, 12 months to September 2000 Main Category Of which Numbers % Of Total House fittings and appliances

308,760 36.7

Home maintenance and repairs, including double glazing installation

(98,947) (11.7)

Other household requirements

107,997 12.8

Food and drink (30,446) (3.6) Mobile Phones (27,078) (3.2) Personal goods and services

137,326 16.3

Clothing and clothing fabrics

(35,882) (4.3)

Professional and financial services

55,795 6.6

Hire and credit (unsecured)

(12,014) (1.4)

Transport 146,131 17.3 Second hand motor

vehicles (72,944) (8.7)

Leisure 86,261 10.2 Holidays (16,021) (1.9) Grand Total 842,270 100.0 Source: OFT, 2001.

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?

Explaining Consumer ComplaintsMost markets work wellFrequent transactions and few

resources tied up with the exchange process.

However, Adverse Selection Moral Hazard

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.

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!

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’.

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

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’.

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.