Literature Review on Analytical Frameworks

Review of the Ministry of Consumer Affairs

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Selecting a Framework

The Efficiency Framework

While the economic efficiency of any particular intervention must be considered, it is not necessarily appropriate to select efficiency as the overriding goal. There are a number of grounds for objecting to the framework described above.

First, and perhaps a little superficially, many of the formal models used to argue for or (more often) against government regulation, or which attempt to explain the functioning of consumer markets, are of such mathematical complexity that they are difficult for a non-specialist to understand and of limited practical utility.

Secondly, traditional cost-benefit techniques are often difficult or impractical to apply to live policy issues.

There are also the objections pointed out by Ramsay (1995, 2000) and others that much of the law and economics literature ignores existing power relations within markets and the various ground rules set by common law and the social order that affect relationships between supplier and trader. Instead, there is a questionable assumption that common law (but not necessarily statute law) seeks economic efficiency (Stigler, 1992).

Similarly, the "rational choice theory" which underlies the efficiency framework ascribes too much rationality to market actors (and judges) and ignores the way consumers and suppliers actually make decisions and behave (Korobkin and Ulen, 2000; Ramsay, 2000). [8] Many of its assumptions have been challenged by behavioural scientists.

In some markets, too much faith may be placed on the forces of competition. Hadfield et al (1998) note the tension in perspectives between competition and consumer protection policy:

From a competition policy perspective, markets with low barriers to entry, low sunk costs, many rivals and rapid rates of entry and exit will tend to conform with the textbook model of a fully competitive market. Yet from a consumer protection perspective, such markets (e.g. used cars, home renovations) may present some of the most severe information problems that consumers confront. (p153)

There is also the criticism that the efficiency framework ignores issues of distribution, as well as values such as fairness, respect and various community values (Cranston, 1978).

The Equity Framework

With respect to the concept of commutative justice, Duggan (1991) argues that it sits uneasily with efficiency frameworks, because the former is preoccupied with the transaction process (free choice), whereas the concern of the latter is with outcomes (wealth preservation). However, in cases of extreme one-sidedness of outcomes, inferences may be drawn about the quality of the transacting process.

The regulation of contracts for shifting losses or redistributing income receives little support and much criticism in the theoretical literature (e.g. Cayne and Trebilcock, 1973; Hadfield et al, 1996). The general ground for objection is that such measures involve significant compromises with respect to efficiency and create "substitution effects"- i.e. they raise costs, lead to cross-subsidisation or deny access to goods or services for particular consumers. Such measures, therefore, often harm those consumers they intend to assist. [9]

On more pragmatic grounds, explicit adoption of distributive justice goals, or an attempt to align consumer policy with the goals of the welfare state, would not appear to be consistent with goals relating to sustainable economic development. This is because of the substitution effects referred to above. Similarly, adoption of some of the European models of welfarism would involve a fairly radical reconception of aspects of contract law and, on that basis, the Ministry of Consumer Affairs is not well placed to instigate such a project.

The only scope to explicitly adopt distributive goals may, therefore, be in respect of markets that are not workably or highly competitive (Hadfield et al, 1996). Beyond those circumstances, it seems outside the mandate of the Ministry.

The problem with inequality of bargaining power as a framework is that it is insufficiently economically grounded-in the words of Schwartz (1995), it is "obviously shallow". In particular, it ignores competitive dynamics within markets. For instance, if firms are operating in competitive markets, they are "price takers" (ibid.) and do not really have a lot of economic power (Williamson, 1995).

Paternalism

With respect to what Duggan (1991) labels "true paternalism", the consensus is that it should be given "a very tight rein" or "treated with considerable caution" (Hadfield et al, 1996), particularly in a liberal society which values individual freedom. Duggan argues that once a case for paternalism is admitted in a particular circumstance, there is no logical stopping place: "If there is insufficient discrimination, collective solutions will become the norm, and the market-based economy will collapse".

In addition, paternalism and efficiency frameworks are incompatible in the sense that they derive from competing premises (Duggan 1991); that is, the efficiency framework assumes people are, in most cases, capable of making their own choices.

However, within the rubric of paternalism Duggan includes a range of considerations relating to measures designed to influence the formation of preferences by consumers, but which stop short of making normative judgements about what it is that consumers should want (Hadfield et al, 1996). This approach should be distinguished from "true paternalism".

An Information-Based Framework

A major objective of the Ministry of Consumer Affairs, in its policy advice and its operational activities, is to remove impediments to voluntary transactions and to minimise the costs of transactions between consumers and businesses.

However, the information-based framework has the advantage of being more specific and providing greater guidance.

Similarly, the central concept of the "bad deal" aligns with the concept of "reasonable expectations" which underpins the Consumer Guarantees Act. The analysis can also be applied to areas such as product safety and other consumer issues.

It explicitly avoids the pitfalls of truly paternalistic approaches. It defers to consumer preferences and consumer judgements about their own interests, including judgements from ethical, cultural and spiritual standpoints.

A Rights-Based Framework

The problem with a rights-based framework is lack of clarity about the basis on which rights are derived. For instance, it does not indicate how trade-offs are to be made between different rights, or between rights and other considerations (such as cost), or how the rights apply to specific contexts. [12]

A rights-based framework is more suited to an advocacy group, rather than a government agency which must balance the interests of a wide variety of stakeholders.

[8] However, much efficiency-oriented discussion does attempt to deal with psychological literature, e.g. Schwartz (1983).

[9] This is contested by Ramsay (2000), who argues that the empirical evidence suggests otherwise.

[10] This appears to be a new movement in law and economics, but as yet scholarship has not considered consumer protection policy in detail.

[11] Hadfield, Howse and Trebilcock define transaction costs as "broadly understood to include informational barriers that prevent a perfect alignment between incentives and goals".

[12] For instance, what does the "right to choose" mean in the context of a single provider of a public service (assuming a broad view of the consumer interest is taken)?

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Review of the Ministry of Consumer Affairs