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Humility, Institutional Constraints & Economic Rigor: Limiting the FTC's Consumer Protection Discretion

International Center for Law & Economics (ICLE) Working Paper 2014-1

49 Pages Posted: 2 Aug 2014  

Geoffrey A. Manne

International Center for Law & Economics (ICLE)

Date Written: July 31, 2014

Abstract

It is in the realm of new technology that many of the FTC’s most significant recent cases have arisen and such cases particularly raise concerns about the scope of regulation and limits on the agency's discretion. Facing novel data security questions, the agency has pushed the bounds of its authority over unfair and deceptive acts and practices (UDAP) to constrain firms trying to experiment and adapt in the face of developing technology. Similarly, by expressing myriad concerns about business methods and practices in high-tech firms — among them Intel, N-Data, Twitter, Google, Facebook Apple and Amazon — and investigating issues ranging from privacy to search engine design to patent enforcement to integrated circuit fabrication, the Commission has pushed the bounds of its Section 5 authority.

The FTC must always weigh the costs of intervention (and the costs of getting it wrong) against the costs of doing nothing. But what, and who, will limit the discretion of a majority of FTC Commissioners in assessing these trade-offs? In technology the question becomes, how should the FTC regulate technology? What’s the right mix of the certainty businesses need and the flexibility technological progress demands? One thing is certain: a top-down, administrative regulatory model of regulation is ill-suited for technology.

The most important, most welfare-enhancing reform the FTC could undertake is to better incorporate sound economic- and evidence-based analysis in both its substantive decisions as well as in its process. While the FTC has a strong tradition of economics in its antitrust decision-making, its record in using economics in other areas is mixed (or at least opaque). Meanwhile, a review of some recent decisions at the agency suggests that the Commission is inconsistent in its application of economic principles.

In this paper I discuss several important aspects of the FTC’s process and substantive decision-making, particularly those that bear on its regulation of technology. In doing so, I assess the contribution (or lack thereof) of proper economic analysis to the Commission’s decisions and how it has contributed and can better contribute to the Commission’s goal of promoting consumer welfare.

The paper draws significantly on Commissioner Josh Wright’s decision-making (as well as some of that of fellow Commissioner Maureen Ohlhausen) to highlight the role of economics at the FTC. Wright’s approach has often been adopted by the Commission (most notably under economically-minded past Chairmen like Tim Muris and Bill Kovacic). But, as I will discuss, there are some glaring exceptions, particularly in the FTC’s consumer protection enforcement practices.

Keywords: FTC, Section 5, Federal Trade Commission, Consumer Protection, Unfairness, UDAP, Josh Wright

JEL Classification: K21, K23, L51, O38

Suggested Citation

Manne, Geoffrey A., Humility, Institutional Constraints & Economic Rigor: Limiting the FTC's Consumer Protection Discretion (July 31, 2014). International Center for Law & Economics (ICLE) Working Paper 2014-1. Available at SSRN: https://ssrn.com/abstract=2474523 or http://dx.doi.org/10.2139/ssrn.2474523

Geoffrey A. Manne (Contact Author)

International Center for Law & Economics (ICLE) ( email )

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Suite 207
Portland, OR Oregon 97232
United States
503-770-0076 (Phone)

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