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Consumer Protection Under Laissez-Faire Regulation-2018-02-28

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Consumer Protection Under Laissez-Faire Regulation-2018-02-28 Paper to be presented at DRUID18 Copenhagen Business School, Copenhagen, Denmark June 11-13, 2018 Consumer Protection Under Laissez-Faire Regulation Daniel Blaseg Goethe University Marketing [email protected] Christian Schulze Frankfurt School of Finance & Management Marketing [email protected] Bernd Skiera Goethe University Frankfurt Marketing [email protected] Abstract Under laissez-faire regulation, regulators choose not to interfere - primarily because they seek to stimulate innovation and protect enterprises from the costs imposed by regulatory compliance. Yet, empirical evidence regarding the ability of laissez-faire regulation to ensure consumer protection is lacking. We test empirically, whether current laissez-faire regulation of price advertising claims (PACs) on popular reward-based crowdfunding platform Kickstarter is sufficient to protect consumers. To do so, we combine data from 12 different sources including official consumer complaints filed with the FTC, BBB, SEC, FBI, and cfpb and analyze 34,745 Kickstarter campaigns covering more than 6 years. We find that consumers of PAC campaigns pay more when buying on Kickstarter than when later buying the same product on retail platforms Amazon or Steam - despite PAC campaigns advertising the opposite. In contrast, consumers of campaigns that do not use PACs (NoPAC) pay less on Kickstarter than retail customers do. We thus establish the existence of economic injury among consumers backing PAC (vs. NoPAC) campaigns. Moreover, we find no evidence of other countervailing benefits for consumers backing PAC (vs. NoPAC) campaigns, no evidence of consumers learning about the economic injury associated with PAC (vs. NoPAC) campaigns and adjusting their expectations and behaviors, and no evidence of effective self-regulation mitigating economic injury associated with PACs, neither by campaign managers nor by Kickstarter. - Do not cite or distribute without permission of the authors - 1 Consumer Protection Under Laissez-Faire Regulation This Version: February 28, 2018 Under laissez-faire regulation, regulators choose not to interfere—primarily because they seek to stimulate innovation and protect enterprises from the costs imposed by regulatory compliance. Yet, empirical evidence regarding the ability of laissez-faire regulation to ensure consumer pro- tection is lacking. We test empirically, whether current laissez-faire regulation of price advertising claims (PACs) on popular reward-based crowdfunding platform Kickstarter is sufficient to protect consumers. To do so, we combine data from 12 different sources including official consumer com- plaints filed with the FTC, BBB, SEC, FBI, and cfpb and analyze 34,745 Kickstarter campaigns covering more than 6 years. We find that consumers of PAC campaigns pay more when buying on Kickstarter than when later buying the same product on retail platforms Amazon or Steam—de- spite PAC campaigns advertising the opposite. In contrast, consumers of campaigns that do not use PACs (NoPAC) pay less on Kickstarter than retail customers do. We thus establish the exist- ence of economic injury among consumers backing PAC (vs. NoPAC) campaigns. Moreover, we find no evidence of other countervailing benefits for consumers backing PAC (vs. NoPAC) campaigns, no evidence of consumers learning about the economic injury associated with PAC (vs. NoPAC) campaigns and adjusting their expectations and behaviors, and no evidence of effective self-regulation mitigating economic injury associated with PACs, neither by campaign managers nor by Kickstarter. Keywords: Consumer protection, crowdfunding, Kickstarter, self-regulation, empirical study - Do not cite or distribute without permission of the authors - 2 Introduction 1.1. Description of Laissez-Faire Regulation Consumer protection is the primary goal of regulation. Regulators seek to prevent avoidable re- ductions in consumer welfare, which could stem, for example, from a lack of competition or result from inaccurate information in the marketplace (Pitofsky 1977, Stern 1971). Yet regulation has known downsides. It can create barriers to entry for other enterprises (Djankov et al. 2002) and lay undue or unnecessary burden on enterprises that increase their costs (Klapper et al. 2006). Ulti- mately, regulation can stifle or choke innovation (Chisholm and Jung 2015, Frieden 2014, Stern 1971, Stigler 1971). As such, regulation can be particularly harmful for young and innovative enterprises. These (smaller) enterprises often lack the necessary resources to bear the costs of regulatory compliance (Bradford 2004). In addition, they find themselves at a disadvantage over incumbents, when reg- ulation negatively affects the innovations upon which their business model depend (Day et al. 2003, Pollman 2017). In response to this apparent tradeoff between consumer protection and innovation, academics, policy makers, and enterprises have proposed a laissez-faire approach to regulation (Haslehurst and Lewis 2016, Lagarde 2017, Ohlhausen 2015). Under laissez-faire regulation, regulators chose not to interfere, which means that they neither apply existing regulation nor create new regulation. The motivation for doing so is that regulators suspect a lack of economic injury to consumers in these contexts (i.e., regulation is not needed), or favor self-regulation as a means for ensuring consumer protection (i.e., setting and enforcing rules is left to consumers and enterprises, Hemphill 1992). Self-regulation has been proposed as a faster, cheaper, and more effective approach to regulation more than 45 years ago (Stern 1971), but has recently gained again in popularity, as - Do not cite or distribute without permission of the authors - 3 regulators have favored a laissez-faire approach to regulation for the FinTech sector (Chiu 2016), ride-hailing services (Ranchordas 2015), and short-term rentals (Lines 2015). Despite the rele- vance of self-regulation in policy making, there is no consensus on its merits and limitations in the literature. Proponents argue that regulation by the authorities is superfluous, if not detrimental, as enterprises themselves have sufficiently strong incentives to protect consumers in many cases (Fischel 1986, Griffin 2012). Others claim that prioritizing their own profits over consumer pro- tection severely limits enterprises’ potential to self-regulate and protect consumers effectively (Keaveny 2005, Pirrong 1995). Despite the popularity of laissez-faire regulation and its advantages for fostering innovation, empirical evidence on its ability to ensure consumer protection is still lacking (Wotruba 1997). The aim of this paper is to investigate whether laissez-faire regulation is sufficient to ensure consumer protection. For this to be true, at least one of the following four criteria must be met (Figure 1). Figure 1: Four Criteria to Evaluate Whether Laissez-Faire Regulation Ensures Consumer Protection 1) There is no need for regulation because there is no economic injury to consumers (Innes 2004). If business models of young, innovative enterprises are sufficiently different from incumbents’, then regulators need not apply regulation that protects consumers in other (es- tablished) markets (Haslehurst and Lewis 2016). - Do not cite or distribute without permission of the authors - 4 2) There is no need for regulation because economic injury is outweighed by countervailing benefits to consumers (Kang et al. 2012). Even if consumers experience economic injury due to non-regulation, consumers might willingly accept such economic injury if it is outweighed by countervailing benefits (Ansip 2016). 3) Economic injury is mitigated through consumer learning (Evans 2012). If consumers learn from their own experiences and from the experiences of others to avoid economic injury (Chisholm and Jung 2015), then regulation will not be necessary. 4) Economic injury is mitigated through self-regulation (Xu et al. 2012). Industry participants might have a strong self-interest in generating consumer trust (Wotruba 1997) and in pre- empting (potentially less favorable) regulation and thus set and enforce policies to protect consumers voluntarily (LaBarbera 1983, Ohlhausen 2015), making regulation unnecessary. 1.2. Studying Price Advertising Claims made on Kickstarter To investigate these four criteria empirically, we must study a type of regulation that is relevant in the market and permits for investigating economic injury experienced by consumers. One such type of regulation are price advertising claims (PACs). PACs are a form of advertising used in the sale of products whereby current prices are compared with a suggested reference price such as former prices, retail prices, or suggested prices by manufacturers (Grewal and Compeau 1992). PACs are widely regulated in the U.S. (Bitta et al. 1981) and around the world (Boddewyn 1982) and regulators such as the FTC have promulgated specific guidelines to determine the conditions under which a PAC is deceptive. For example, if a seller makes a PAC such as “Sold for $25 only today, 50% off the regular retail price”, regulation requires an immediate price increase after the end of the promotion (e.g., Massachusetts Law, 940 C.M.R. §6.05), an actual price increase to the stated amount (FTC 16 CFR Part §233.5), and maintenance of the stated amount for a reasonable - Do not cite or distribute without permission of the authors - 5 time (BBB Code of Advertising §9.4). The effects of PACs are well-researched (see e.g., Compeau and Grewal 1998, Grewal
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