Economics of Consumer Protection: Contributions and Challenges in Estimating Consumer Injury and Evaluating Consumer Protection Policy

The author examines the role of economics in consumer protection, drawing from her experience at the U. S. Federal Trade Commission (FTC), which has a dual mandate to promote competition and protect consumers. She compares the long established use of economics in competition law enforcement and policy to the relatively new application of economic analysis to consumer protection policy and law enforcement. She highlights contributions of economists to the development of consumer protection policy at the FTC and describes key questions involved in the economics of consumer protection policy. The focus of this article is on the definition and estimation of consumer injury from deceptive or unfair practices, including approaches to estimate consumer injury from lapses in data security and privacy policies and procedures. The paper brings together different strains of relevant economic literature, leading to a clearer exposition of alternative approaches to estimating consumer injury from an economic perspective. She also addresses, briefly, the debate over the role of behavioral economics in consumer policy, concluding that the appropriate tools for policymakers will vary depending upon their policy goals; policies appropriate to meet the goal of changing consumer choices in a particular direction may differ from policies suitable to meet the goal of improving the consumer information environment.

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Notes

Strategic plans and annual reports provide an overview of of an agency's goals and results. In addition, the joint conference between the FTC and the Journal of Ecnomic Inquiry provides insight into the role of economics on consumer protection policy.

Econlit Database, Economics Research Database, EBSCO, https://www.ebsco.com (searched on April 24, 2018).

Google Scholar, https://scholar.google.com (searched on April 24, 2018). “Search in the abstract” option is not available on Google Scholar.

Although Beales et al. (1981) note that consumer injury is an important determinant of the costs and benefits of government intervention, the term “consumer injury” appears only once in this seminal article.

To the extent that the concept of “consumer injury” from deception appears in the economics literature, thus far, the focus is generally on static models. Even more work needs to be done to consider the dynamic effects.

Despite the benefits of controlled copy-testing to ensure that alleged misleading claims really are really misleading to the relevant audience, as a practical matter, rigorous consumer research is costly, and the cost of such testing may not outweigh the benefits (Owen and Plyler 1991; Pappalardo 1997a, b).

Similar diagrams and analyses appear in the industrial organization textbook by Carlton and Perloff (1994) and a paper by Bagwell (2005) later incorporated into the Handbook of Industrial Organization (2007). Both papers cite back to the work by Dixit and Norman (1978).

This representation of expectations damages appears to be consistent with the description of expectations damages in a working paper by McFadden and Train, (2019, p. 14). McFadden and Train extend Train (2015) to include consideration of a price increase that can arise when firms over-sell product attributes. McFadden and Train develop a new welfare measure, the Market Compensating Equivalent, and present it as an “. . . updated, practical version” of Marshallian Total Surplus (p. 4) and provide estimating equations for various damages concepts. They also describe welfare calculus in a product market using a graph similar to the ones presented earlier.

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Authors and Affiliations

1. Bureau of Economics at the Federal Trade Commission, Washington, DC, USA J. K. Pappalardo

1. J. K. Pappalardo