Helping buyers beware: the need for supervision of big retail.

• Author: Van Loo, Rory
• Position: Introduction through II. Firms Systematically Charge Anticompetitive Prices B. Potential Market Constraints on Supracompetitive Pricing 2. Learning, p. 1311-1350

Since the 2008 financial crisis, consumer regulators have closely supervised sellers of credit cards and home mortgages to stamp out anticompetitive practices. Supervision programs give financial regulators ongoing access to sophisticated firms' internal data outside the litigation process. This often enables examiners to identify and correct harmful conduct more rapidly and effectively than would be possible using publicly available information and cumbersome legal tools.

Consumers spend four times more on retail goods than on financial products. The retail sector's dominant firms--such as Amazon, Walmart, Unilever, and Kraft--employ large teams of quantitative experts armed with advanced information technologies, huge volumes of data, and in-store experimentation to develop behavioral economics-related practices analogous to those seen in consumer finance. The empirical data suggest those practices in the aggregate may significantly harm all households, costing even a family at the poverty line hundreds of dollars annually. Yet unlike in consumer finance, regulators have declined to supervise sellers

of retail goods.

This Article argues for wider adoption of the financial sector's emerging-- though largely unarticulated--paradigm that views regulatory supervision of firms as central to consumer protection. That paradigm suggests the consumer goods sector needs the inverse of what consumer finance needed in the wake of the 2008 crisis. Then, Congress created the Consumer Financial Protection Bureau to provide more consumer protection because regulators had previously focused excessively on supervising financial institutions to ensure firms' safety and soundness. In contrast, the consumer goods sector has a regulatory body--the Federal Trade Commission's (FTC) Bureau of Consumer Protection--that focuses solely on consumer protection but does not supervise firms. Fortunately, congressional action would not be required for the FTC to develop a supervision program. The agency's leadership would simply need to exercise the authority that Congress long ago granted.

INTRODUCTION I. THE SOPHISTICATION GAP BETWEEN FIRMS AND CONSUMERS IS LARGE A. Defining Harm B. Limits on Consumer Sophistication C. Sophisticated Institutions Capitalize on Consumer Limitations II. FIRMS SYSTEMATICALLY CHARGE ANTICOMPETITIVE PRICES A. Evidence of Anticompetitive Practices in Retail Goods 1. Price Misperception from Non-Salient Dimensions a. Misperceiving Stores' Prices b. Misperceiving Complex Products' Prices c. Misperceiving Deceptively Simple Products' Prices 2. Failing To Compare Effectively a. Framing the Price as a Bargain b. Obfuscating Product Information B. Potential Market Constraints on Supracompetitive Pricing 1. Reputational Constraints. 2. Learning 3. Protection by Sophisticated Shoppers III. AGGREGATE HARMS ARE POTENTIALLY SIGNIFICANT A. The Costs of Market Failure May Be Significant B. Alternative Cost: Paying with Time C. Inequality Implications D. Market Inefficiency IV. EXISTING INSTITUTIONS ARE INSUFFICIENT TO PREVENT HARM A. Legislatures B. Courts 1. Doctrinal Basis for Lawsuits a. Common Law Doctrine b. Statutes Prohibiting Unfair and Deceptive Acts 2. Procedural Designs for Lawsuits C. Agencies 1. Tate Regulatory Efforts 2. The FTC a. The FTC Has the Statutory Authority to Regulate Supracompetitive Pricing Practices i. Unfairness Statutory Language ii. Unfairness Policy iii. Unfairness Case Law b. Ex Post Enforcement Focus Hinders FTC Consumer Protection i. Narrow Legal Analysis ii. Information Asymmetries D. Summary: Existing Institutions Inadequately Protect Consumers V. POLICY CONSIDERATIONS A. Redesigning for Institutional Supervision B. Sector-Level Rulemaking: Information Disclosures 1. Disclosures for Technological Intermediaries 2. Disclosures to Consumers a. Mandated Consumer Unit Pricing b. Including Tax in Shelf Price c. Limits on Disclosures to Consumers CONCLUSION INTRODUCTION

Mass consumer goods are a $2.6 trillion dollar industry accounting for 23% of household expenditures. (1) Despite this scale, the sector's dominant firms--such as Amazon, Target, Clorox, and Kraft--operate with little consumer protection oversight of the type found in consumer finance. (2) It is typically assumed that consumers should spend the time necessary to find the best deal or be held responsible for the price they paid on simple items like clothing, food, cleaning products, and household appliances.

The commercial and regulatory landscape in consumer goods today mirrors that in consumer finance prior to 2008. For years before the 2008 financial crisis, federal regulators mostly ignored the large body of scholarship arguing that financial institutions were becoming increasingly sophisticated at systematically exploiting consumers. (3) The typical response was that consumers could handle it--that with a little effort and research they could understand simple concepts such as monthly mortgage payments or credit card late fees. (4) After the 2008 crisis a consensus emerged across the political spectrum that regulation may be needed in the face of the financial industry's practices. (5) Congress responded in part by adopting then-Professor Elizabeth Warren's suggestion, later articulated in greater depth with Professor Oren Bar-Gill, to create a new federal agency to oversee credit product safety on behalf of consumers. (6) The response can be seen as a paradigm shift toward examining firms' data to correct market failures resulting from consumer irrationality and information asymmetries. (7)

If this new paradigm is valid in consumer finance, a similar one is needed in the consumer goods sector. To be sure, the sector's firms greatly benefit society. Large consumer goods companies such as Walmart enable significantly lower prices. They have thus helped reduce an important measure of poverty--what consumers are actually able to purchase with their income. (8) Consumer financial products have similarly brought great benefits to society by providing greater access to credit, thus enabling families to purchase homes and weather financial storms.

The conclusion that the consumer goods sector nonetheless needs a regulatory paradigm similar to that in consumer finance rests on three counterintuitive premises, the case for each of which is absent from the literature. First, there is evidence of similar widespread behavioral market failures in both sectors. Second, the aggregate monetary harm from anticompetitive pricing in the consumer goods sector may be large, potentially even larger than in consumer finance. Finally, regulators cannot effectively monitor the consumer goods sector's anticompetitive practices based on publicly available information. Like in finance, it is crucial that regulators understand how firms operate on the inside.

The empirical evidence suggests the two sectors exhibit similar--and similarly widespread--behavioral market failures. The consumer protection literature has largely ignored these similarities. Legal scholars have occasionally referenced well-established anticompetitive practices for a particular good, such as lowering the price of printers and increasing the price of ink cartridges, as a rhetorical device to illustrate analogous practices in contractual products. (9) But consumer goods are typically mentioned by legal scholars alongside other products only to contrast their simplicity with more complex contract-driven products needing regulation. (10)

This perception of simplicity is important because it can determine regulatory outcomes. A financial product's complexity is commonly seen as a key enabler of irrational decisionmaking. (11) An irrational decision is one that does not advance the consumer's objectives as well as an alternative choice; it may result from cognitive limitations such as overweighting short-term, teaser rates in a contract or incorrectly calculating costs. (12) Complexity increases the likelihood of irrational decisionmaking because consumers must process more information, causing them to use mental shortcuts and raising the costs of information acquisition. Importantly, consumer protection scholars and regulators can typically identify complexity in terms of individual products--such as the length of the contract or the many calculations needed to determine the total price. (13) They are thus largely able to identify products in need of greater regulatory attention by analyzing only the product.

Applying the same product-centric analysis to goods can erroneously create the impression of simplicity. A growing percentage of individual technological goods arguably have inherent complexity comparable to that of contractual financial products, but most--such as a jar of peanut butter--do not. (14) Instead, most of the complexity in consumer goods shopping can be seen by looking at the broader decisionmaking context rather than the product. For example, economists have found that online sellers can make shopping for individual products complex by lengthening descriptions and making it difficult to quickly assess the full costs of an item among numerous choices. (15)

Shopping in large retail stores also involves complexity. For example, between 1975 and 2008, the number of products in the average supermarket increased from 8948 to 47,000. (16) Whereas stores previously sold only one version of Crest toothpaste, supermarkets typically carry twenty-seven varieties of Crest alone. (17) While this innovation and scale have brought many benefits to consumers, a growing body of research suggests that the resulting complexity causes consumers to rely on mental shortcuts in making decisions. (18) In deciding whether one store has better prices than another store, for example, consumers rely on prices of only a small number of highly salient items--often only three to five. (19) Non-salient items are not factored into a consumer's decision of where to shop as much as...