Key Trends in Consumer Policy

Review of the Ministry of Consumer Affairs

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Market Trends

Globalisation

The most prominent market trend for New Zealand is the emergence of the global marketplace. By its nature, globalisation limits New Zealand's possibilities of autonomously managing its domestic economy. Through its international treaty and trade obligations, New Zealand must allow its consumers to participate in the global marketplace, and globalisation provides the biggest challenge to MCA in terms of its borderless nature and the opportunities it makes available to consumers.

To date, online commerce and in particular business-to-consumer transactions have not lived up to early expectations. A recent European Union survey result (Commission of the European Communities, 2002) shows that European consumers do not feel well-protected when transacting across borders within the European community itself. Only 4% of consumers identified themselves as frequent purchasers. The reasons for this lack of take-up focus on issues of privacy and security when transacting. Another commentator [6] suggests that young, educated and less risk-averse consumers do not hold the same fears. As these consumers increase in number and the current privacy and security issues are addressed internationally, e-commerce will increase its market share.

Consumer-to-Consumer Transactions

The Internet allows consumers the greatest opportunity to buy from the global marketplace and to avoid dealing with businesses altogether. Locally, there are a number of Internet-based businesses facilitating consumer-to-consumer (c2c) transactions. As already described, issues of privacy and security may be preventing this market from developing its full potential, but as a trend it may require monitoring by MCA.

Technology Challenges

The Australian Competition and Consumer Commission (ACCC) (1999) has identified some of the challenges facing consumers in the new Internet-based market as:

New Zealand participates in international fora considering these and other issues that impact on e-commerce. When the risks identified above have been reduced or removed, there is no practical reason why financial and insurance services, for example, cannot be transacted across borders.

The range of products and services that are available via the Internet is likely to increase. Where "Traditional" consumers may base their purchase decisions on basic need and best price, "I-Cons" look for features that offer lifestyle enhancement or uniqueness. If we accept that "I-Cons" will, in the future, have the most disposable income, it follows that producers will continually innovate to meet their demands.

The Information Challenge

Hadfield, Howse and Trebilcock (1996) note that the increasing diversity of products and producers implies increasing demand on consumers to access product information. As producers attempt to distinguish their products and gain market share, consumers are faced with a bewildering breadth of information. A further layer of complexity can be created by the marketing of secondary products and incentives such as extended warranties, easy finance deals and loyalty schemes. The provision of information (whether incentive-based such as a manufacturer's warranty or by the use, in credit for example, of standard form contracts) can operate as a method to shift the terms of trade in favour of sellers (ibid.).

Distinguishing between the exploitative use of such provisions ... and their efficient use to reduce the costs that private information imposes on transactions is a difficult, but necessary, task.

Recognising that different types of consumer do not necessarily need, want or receive information in the same way can assist MCA to design its information strategies.

Whether a transaction is via a traditional retail outlet, telemarketing, door-to-door selling or the Internet, consumers are expected to make complex market choices daily. Today's consumers are time-poor. Whether the consumer making a choice is a "Traditional" or an "I-Con", it is recognised that there are five stages in the buying process: recognition of need, information search, evaluation of alternatives, purchase decision and post-purchase behaviour (Asch and Wolfe, 2001).

It is also clear that consumers will undertake a higher level of search for products that are perceived as high risk and/or expensive-a car or a mortgage, for example. In general, consumers receive the most information about the product they wish to purchase from the seller or manufacturer directly (who knows most about the product).

Faced with an increasing choice of producer and product and a hefty time investment in the search for information, even the most risk-averse consumers will make less than optimal choices (Hadfield et al, p50). Rational consumers will stop searching for information when the gains from searching are outweighed by the cost of further searching. Conversely, information can be expensive to produce and disseminate, and at some point the producer must draw the line because the cost of producing information outweighs the benefit the producer will receive. In this way producers strongly influence the size of information shortfalls (UK Office of Fair Trading, 1997).

The choice of how much information consumers should collect before making a purchase will depend on the cost of obtaining and processing the information. But information shortfalls do not necessarily lead to consumer detriment-it is the extent to which the shortfall could have been avoided that has detrimental potential. Avoidability depends on the remedies available to consumers (ibid., p65).

The UK Office of Fair Trading describes the remedies available as either market solutions which include "informational signals" such as warranties; or interventions which may include forced disclosure or direct regulation. They conclude that the degree to which consumers can judge whether or not a purchase decision is detrimental depends on what consumers can do to remedy it or avoid it altogether. Without considering avoidability, it is not possible to know whether or not the purchase will be detrimental-this is at the heart of most informational problems (ibid., p66).

Informational problems cut across all markets, from high-tech to no-tech markets like door-to-door selling. The Internet is different because it allows consumers to independently search for information, not only from producers and regulators but also from other consumers. In many ways it can be likened to a worldwide word-of-mouth recommendation service.

In the Consumer Guarantees Act and the Consumer Credit Bill, [7] consumers have legislation that will hopefully be "future-proof"; that is, will remain relevant despite future market developments. Flexibility of approach will be of key importance if MCA is to have any impact in a marketplace that is changing rapidly. The challenges identified by the ACCC (above) are shared internationally, but to date they have not been addressed.

Despite all the strengths and opportunities created by the Internet, it will never fully replace personal shopping. In the future MCA may need to devote resources to researching the most effective methods of providing information to consumers on both frontiers.

|Index|Phase One: Report : Background Papers|Phase Two: Final Report|

Review of the Ministry of Consumer Affairs