Consumer Protection

The Economic Approach to Law (Uriel Procaccia ed.), 2012

Harvard Public Law Working Paper No. 18-42

49 Pages Posted: 27 Jun 2018 Last revised: 8 Dec 2018

See all articles by Shmuel I. Becher

Shmuel I. Becher

Victoria University of Wellington

Oren Bar-Gill

Harvard Law School

Date Written: 2012

Abstract

The traditional approach to consumer protection posits that the consumer is in a state of inferiority in the seller-consumer relationship. Sellers often have superior experience, resources, access to professional counselling, influence with policy makers, and economic power. Consumers enjoy none of these. They are exposed to manipulation by firms, whose goal is to maximize the bottom line in their balance sheets. Thus, consumer protection laws rest on the assumption that the typical imbalances between consumers and sellers call for regulatory legal intervention, which will protect the former from exploitation by the latter.

The starting point of the economic analysis of law is entirely different. According to the economic approach, market forces can protect consumers even in the absence of legal intervention. Hence the economic analysis of law rejects the traditional assumption of consumer protection, namely that the law must leap, almost automatically, to the consumers’ defense. Yet the economic approach does not deny the need for legal intervention. This may be justified, according to that approach, where there is market failure; that is, when market forces do not guarantee efficient allocation of goods and services.

The economic analysis recognizes several market failures. In this chapter we focus on two, of particular importance for consumer markets. The first is imperfect information. The second is bounded rationality. We show that sometimes market forces are insufficient to guarantee efficiency and protect consumers. We focus on consumer contracts but draw lesson for consumer law more generally. Against this background, we examine some of the main legal policy interventions: mandated disclosure, prohibition of misleading advertising, default rules, cooling off periods and withdrawal rights granted to consumers. We then discuss specific issues arising in the seller-buyer framework, such as ongoing, long-term contracts. Finally, we consider the question of enforcement.

Keywords: consumer law, consumer protection, market failures, cooling off period, bounded rationality, information asymmetry, information overlaod, over optimism, consumer contracts, soft paternalism, regulation, informed consumers, consumers' heterogeneity, disclosures, default rules, enforcement

Suggested Citation

Becher, Shmuel I. and Bar-Gill, Oren, Consumer Protection (2012). The Economic Approach to Law (Uriel Procaccia ed.), 2012, Harvard Public Law Working Paper No. 18-42, Available at SSRN: https://ssrn.com/abstract=3194411

Shmuel I. Becher (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

HOME PAGE: http://www.victoria.ac.nz/sacl/about/staff/samuel-becher

Oren Bar-Gill

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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