ESSAY CONTENTS INTRODUCTION I. CONSUMER LAW AND ITS INSTITUTIONS A. Consumer Protection Law B. Antitrust Law II. THE ANTITRUST/CONSUMER PROTECTION PARADOX A. Example 1: Entry and the Introduction of New Products B. Example 2: Above-Cost Price Discounting C. Example 3: Product Bundling III. THE PERSISTENCE OF THE PARADOX: A COMPARATIVE INSTITUTIONAL ANALYSIS A. The Economic Institutions of Consumer Law: Price Theory and Behavioral Economics B. The Legal Institutions of Consumer Law: Common Law and the CFPB C. The Political Institutions of Consumer Law: The Last Hope for Convergence? CONCLUSION INTRODUCTION
The intellectual soul of American consumer law is up for grabs as a battle emerges between its two pillars--conventional consumer protection law and antitrust law. The former focuses on ameliorating the deleterious effects of market failures associated with consumers' imperfect or incomplete information; the latter provides the institutional framework for protecting consumers from losses associated with the creation and acquisition of monopoly power. As both share the common goal of protecting consumer welfare, it is unsurprising that legal scholars, economists, and regulators envision a fully integrated "consumer law"--a term I use hereafter to refer jointly to antitrust and consumer protection.
The potential complementarities between antitrust and consumer protection are well known. (1) Both consumer law institutions seek to maximize consumer welfare, with antitrust policy focusing on market failures associated with the creation of market power and consumer protection emphasizing instances in which, despite ample competition, consumer welfare is threatened by information asymmetries and deception. (2) A simple price-theoretic, rational choice model of complementary operation of antitrust and consumer protection institutions might therefore envision consumer protection institutions allocating resources aimed toward improving disclosures, filling information gaps, and protecting against fraud and deception, with antitrust limited to preventing the unlawful creation or acquisition of market power and failures of the competitive process. While the consumer welfare paradigm would discipline both consumer law institutions under this complementary view, lines would clearly be drawn between them so as to minimize conflict. (3) Indeed, the global trend is toward integration of consumer law institutions. (4) Despite these substantial economic and legal complementarities, the Dodd-Frank Wall Street Reform and Consumer Protection Act portends a deep rift in the intellectual infrastructure of consumer law that threatens the development of both bodies of law, as well as consumer welfare and economic growth. This Feature identifies the intellectual and institutional origins of that rift and describes the emerging paradox it has created: a body of consumer law at war with itself.
Dodd-Frank heralded a revolution in consumer protection law and enforcement. It created the Consumer Financial Protection Bureau (CFPB) and granted it unprecedented regulatory powers in the consumer law context, including the exclusive rulemaking and primary enforcement authority over consumer financial protection, (5) while divesting consumer financial protection functions from the Federal Trade Commission (FTC) and other federal regulators. (6) In addition to the authority to prohibit unfair or deceptive practices in consumer financial product markets, (7) a statutory grant of power otherwise identical to that granted to the FTC, (8) the CFPB is charged with eliminating "abusive" practices (9) in the consumer financial services business and ensuring that consumer disclosures are "fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service." (10) Dodd-Frank also attempts to insulate the CFPB from interference by the political branches by lodging the new Bureau in the Federal Reserve, (11) giving it a budget that lies outside the appropriations process, (12) and providing the Director of the CFPB with a term appointment of five years subject to removal only for cause. (13)
What is most important about Dodd-Frank and consumer protection, however, is that it represents the arrival of behavioral law and economics as the intellectual centerpiece of the current administration's approach. Behavioral law and economics, as advocated by Professors Bar-Gill and Warren in an article laying out the blueprint for a new agency, (14) played a significant role in the creation of the CFPB. Behavioral law and economics is built upon the foundational assumption that consumers make predictable and systematically irrational decisions, and, indeed, that individual choice is not a reliable predictor of individual economic welfare; (15) this observation in turn has inspired both commentators and legislatures to propose various restrictions on consumer choice. (16) Behaviorists broadly contend that consumers systematically make choices that are both to their detriment and unrepresentative of their true preferences, and much of the behaviorist literature dedicates itself to establishing one or more of these biases in a specific context.
A critical component of the CFPB's mission, representative of this new vision of consumer protection, is to improve consumer decisionmaking by altering the basic design of consumer credit products, adding disclosure requirements, reducing consumers' choices, and instituting default rules favoring products approved by the given legislative agency. Notably, if this component of the CFPB's mission merely involved improving disclosures to ensure consumers are able to appropriately assess the risks of consumer financial products, its impact would be relatively modest. However, the behavioral approach to consumer law rejects revealed preference and with it the core economic link between consumer choice and individual welfare. Revealed preference in economics is the principle that allows economists to recover information about consumer preferences, and hence utility, from actual choice behavior. (17) Application of revealed preference requires an assumption that the consumer's preferences are stable over the relevant time period, but when that assumption is satisfied, it provides a powerful tool for extracting policy-relevant information about consumer preferences. Revealed preference does not imply that individual choices will lead to the socially optimal outcome or guarantee the absence of market failure; it simply states that among the choices available to the individual, the selected bundle best satisfies consumer preferences.
While I describe the CFPB's behaviorist intellectual foundation as rejecting the notion of revealed preference, it is important to understand that this does not merely mean that the CFPB rejects consumer sovereignty. Nor does price theory merely embrace consumer sovereignty. A brief background in the intellectual underpinnings of modern market regulation highlights the distinction between the behavioral approach to regulation and the standard microeconomic approach.
The standard economic theory of regulation predicates governmental intervention upon a demonstrable and correctable market failure. (18) A market failure occurs when functioning markets fail to realize full gains from trade through efficient production. (19) A broad swath of regulations, many of which outright prohibit certain products or reduce consumer sovereignty drastically, embraces this standard economic model. For example, consider the cases of exploding toasters and toys tainted with dangerous levels of lead. In either case, standard economic models of market failure associated with informational asymmetries may justify regulation to correct market failure. (20) Current regulations to combat monopolies, information asymmetries, and externalities draw upon this standard economic model. Environmental restrictions seek to force firms that are inefficiently overproducing to instead internalize pollution costs imposed upon third parties. (21) Industry-wide disclosure mandates on products ranging from medicine to finance prevent firms from inefficiently overproducing in reliance on the reasonable but unjustified expectations of lesser-informed consumers.
Whether or not these regulations achieve their stated goals remains beyond the scope of this piece, but it suffices to say that each of these regulations--and the standard economic regulatory framework associated with them--assumes standard, stable, rational consumer preferences. In other words, the standard framework maintains (even when restricting consumer choice) that the consumer's choice behavior reflects sincerely held preferences. Notwithstanding the revealed-preference principle, because of the market failures described above, social welfare may not be maximized. Whereas the standard economic model attacks some market failure preventing private exchanges from maximizing rationally held consumer preferences, behaviorists advance a combination of theories that may be summarized as "imperfect optimization" (22) : consumers do not maximize their own welfare, even absent traditional market failures. (23)
Both economic approaches contemplate situations in which restricting individual choice improves both private and social welfare. The key distinction between behavioral and rational choice approaches to consumer protection is therefore not differences in respect afforded to consumer sovereignty per se, but rather the conceptual link between individual choice and inferences of economic welfare. Whereas price theory embraces the conventional economic understanding of revealed preference-an economic agent choosing apples over oranges is made better off by his decision--the behaviorist approach requires a comparison of the agent's choice with the selection that the agent would...