FAMILY GOUGES STORE! The FTC acts quickly to restore fairness!
The last time you got a great deal at the store, or low balled someone on EBay and came away with HUGE amounts of consumer surplus, did you stop to think about how “fair” the exchange was? Typically, people reason that if the seller is willing to let it go at a certain price, that is a “fair price”. Sadly, that reasoning breaks down when applied in the reverse direction.
Mark Steckbeck wrote up a very entertaining opening paragraph introducing a piece on consumer protection laws. Please read it.
The piece itself was written by Skip Oliva and is an excellent read. Here’s the first part of the post:
It’s difficult to reconcile the American concept of “equal justice under law” with the Federal Trade Commission’s motto, “Protecting America’s Consumers.” The implication is that there is one set of laws for consumers and another set—affording lesser protection—for producers and sellers. This conflict presents itself in all “consumer protection” laws, and it stems from an awkward premise: That in any given economic exchange, the party trading cash holds the legal and moral high ground over the party trading a good or service.
Put another way, try to fashion a consumer protection or antitrust law in a purely barter economy. If A trades two pounds of flour to B in exchange for a bushel of apples, which party is the “consumer” entitled to government protection? It’s easy to apply common law principles regarding fraud to such a transaction, but virtually impossible to employ contemporary consumer protection standards, which require a presumption that one trader is good and the other is bad.
Antitrust regulators obsess over short-term prices. They deem a price “anticompetitive” when they think it should have been lower. The seller is liable for trading a good at anticompetitive prices. But why isn’t the buyer equally liable? If the government sets the competitive price of a good at x and a seller trades that good at x+1, both the buyer and seller undermine the competitive price level.
The rejoinder to this is that the buyer is “forced” to pay the anticompetitive price because the seller controls the supply of an item desired by the buyer. But the reverse is also true. The buyer controls a supply of an item desired by the seller—cash. The seller lacks the ability to obtain cash from anyone except those cash-holders willing to trade for the seller’s item.
Then there’s the impact on third parties. A potential buyer who is only willing to pay the government-determined competitive price—loses out when another buyer chooses to pay the anticompetitive price. Why, then, doesn’t antitrust law permit suits against those buyers who perpetuate anticompetitive price levels?
Seriously, go read Steckbeck’s opening paragraph, then read the post by Oliva. Now.
on July 30th, 2007 at 8:13 pm
As a proud Wisconsinite, I’d just like to point out that MY state recognized and corrected this hypocrisy years ago, with our much touted minimum markup laws. It’s keen economic insights like that which justify our state motto of “Forward.”
on July 31st, 2007 at 4:11 am
Just to push the issue, isn’t the article sort of missing the point? Consumer are those who purchase goods with money. They need “protection” from those who purchase money with goods, and turn a profit. After all, few would call Amazon.com’s inventory of books of a “profit.” That’s not how capitalism measures success–when you earn money, you earn a profit, and therefore you’re no longer the “consumer.” It’s not that difficult to define.
Oliva’s point of “try to fashion a consumer protection or antitrust law in a purely barter economy” is non-sensical; it’s like saying, “try to fashion the Freedom of Speech in a purely communist nation.” Uh, we’re not in that kind of nation, so of course those laws couldn’t apply.
on August 1st, 2007 at 2:00 pm
Am I going to be the first outsider to comment on this blog…? Oh, wow. Anyway, I think Oliva is wrong when he assumes that the main reason for consumers’ protection is “that in any given economic exchange, the party trading cash holds the legal and moral high ground over the party trading a good or service”. The real reasons for consumers’ protection have nothing to do with morality… See for example Dan Klein’s article for Independent Review - he describes two main reasons: (a) paternalism - the consumers do not know what they want or they do not know what is going to hurt them (they lack certain “cognitive abilities” or have “bounded rationality”), (b) market failure - the consumers know what is not good for them, but they lack information about the goods and services they buy (market fails in delivering the right amount of the right information). Thus the government steps in and tries to fix these two problems (that are usually mixed in the reality).
Oliva has certain point when he makes the distinction about monetary and non-monetary exchange - in case of monetary exchange (and from the mainstream perspective) the consumers’ protection is more necessary, because the information asymmetry is greater - the seller trades a good of unknown quality for money of known quality (you know all the weird marks the government puts on the banknotes to make it really easy to recognize whether they are false or not, right? - I am omitting problems of the banking sector and fractional reserves banking). So from this perspective, the consumer (buyer) is always disadvantaged as compared to the buyer. Klein shows that this is not necessarily true. In the barter exchange, both parties have some kind of information advantage, so it can open wider field for negotiations (it would be interesting to have a look at this from game-theoretical perspective). I also think it is awkward to use the concept of consumer’s surplus in any kind of argumentation - it does not say anything else that consumers would be better off if they were buying stuff for lower prices and moreover it is based on some false assumptions (such as interpersonal and intertemporal comparison of utility).
One last note - you also might be interested to read an article co-authored by Richard Posner where he is trying to make a point for antitrust measures in non-profit sector (that is well beyond the limits of what could be normally called monetary exchange economy).