Six Scandals: Why We Need Consumer Protection Laws Instead of Just Markets

Abstract

Markets are powerful mechanisms for serving consumers. Some critics of regulation have suggested that markets also provide consumer protection: for example, Nobel Prize-winning economist Milton Friedman said “Consumers don’t have to be hemmed in by rules and regulations. They’re protected by the market itself.” This article’s first goal is to test the claim that the market provides consumer protection by examining several recent incidents in which companies mistreated consumers and then exploring whether consumers stopped patronizing the companies, which would deter misconduct. The issue also has normative implications because if markets consistently protected consumers, society would need fewer regulations and regulators, as Friedman suggested. The article’s second goal is to begin construction of a theory on when the market does or does not protect consumers.

The article finds a more nuanced situation than Friedman and other critics theorized. In some instances, businesses’ sales actually increased after their misconduct became public, despite the fact that, in at least two cases, consumers had told pollsters they would avoid patronizing the company. Even when companies suffered declines in sales after their misbehavior became public, the scandals became known only because of laws and those who enforce them, suggesting that it is the very rules that Friedman decried that led to a market response. Though it is impossible to know what would have happened if the problematic conduct had not occurred, the evidence suggests that markets alone are often not enough to protect consumers, or at least that markets are not a reliable consumer protection mechanism.