How to Economize Consumer Protection

Posted by Social Science Research Network

How to Economize Consumer Protection

By Michael R. Baye (Indiana University) & Joshua D. Wright (George Mason University)

The US antitrust laws are about protecting consumers from harm stemming from abuses of competition and the competitive process. Courts, private parties, and federal agencies extensively rely upon economists to help evaluate the merits of, and potential harm from, alleged violations of the Clayton Act, the Sherman Act and, more generally, business practices that are alleged to run afoul of antitrust law. These analyses often involve statistical and econometric techniques that facilitate decision-making based on scientific evidence of likely harm to competition or consumers. But in contrast, the typical approach to a consumer protection matter relies upon a combination of surveys and subjective opinions to establish the facts relevant to a consumer protection dispute.

We show how economics can be used in consumer protection matters to help prove or disprove a claim that a business practice adversely impacted consumers, and to shed light on the economic merits of litigating versus settling cases. In our experience, many seemingly benign consumer protection settlements induce asymmetries in the marketplace that put the settling firm at a competitive disadvantage. Regardless of whether one’s goal is to protect consumers or defend one’s client, doing so requires accounting for these effects. More broadly, economics provides tools which, when properly utilized, can help improve the allocation of scarce resources — at agencies and beyond — to better serve and protect consumers and competition.

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