Public Policy in Private
Markets
Information Policies
Announcements
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5/1:
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Last day of classes
HW 7 due, will post soon
You will get exam 2 back, together with a
“tentative” grade
Tue, 5/8
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Comprehensive final exam:
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4:00 – 6:00 pm, Thompson Hall 106
Overview of this Course
1.
Competition Policies (completed)
2.
Information Policies: information that is
presented to consumer
3.
Product Quality policies: health, safety,
quality
Non-Price Consumer Protection
Example: Calorie posting
•
In 2008, NY became the first city to enforce
restaurants to post calories on all food items
(with font as large as price)
Calorie Posting
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Does this policy help the consumer?
1. Yes, consumers make a better informed
decision
2. Yes, consumers reduce unnecessary
calorie consumption
3. No, it does not affect consumers’
consumption habits
Calorie Posting
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Does this policy affect firm behavior?
1. Yes, firms reduce calorie content in their
products
2. Yes, firms start offering new products
3. No, it does not alter firm behavior
Calorie Posting: Research Findings
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Recent article by Bollinger, Leslie and
Sorensen (2011):
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Look at the effect of NYC’s calorie posting policy on
Starbucks
Calories consumed decrease by 6% on average
(but 26% for heavy users)
Calories per drink DO NOT decrease, decrease is
entirely coming from less food purchases
Starbucks: profits remain unchanged and food
offerings have been modified (smaller servings)
Why Do Consumers Need Protection?
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Inadequate Information Leads to:
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Errors of Commission
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Buy more than you would if you had complete
information (e.g. Starbucks? Acai berry)
Pre-purchase assessment is too favorable
Errors of Omission
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Buy less than you would if you had complete
information (e.g. nutritional yeast)
Pre-purchase evaluation is too unfavorable
Why Do Consumers Need Protection?
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Claims:

increased energy levels, improved sexual
performance, improved digestion, detoxification,
high fiber content, high antioxidant content,
improved skin appearance, improved heart health,
improved sleep, and reduction of cholesterol levels
Why Do Consumers Need Protection?
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Properties:
 Important source of protein and vitamins (Bcomplex vitamins) and is a complete protein.
Naturally low in fat and sodium.
Why Do Consumers Need Protection?
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Result:

Purchasing decisions do not maximize
utility
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Competition is somewhat harmed:

Some products are rewarded “too much” while
others are rewarded “too little”
Information problems
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Why may these problems be serious?
Types of goods/qualities:
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Search: consumer can judge qualities by
inspection
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Experience: quality can be judged postpurchase
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E.g. tomato: color, size, etc.
E.g.: cell phone service by company X
Credence: can’t judge quality even after
purchase
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E.g.: pesticide residues on certain products
Information problems
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Information problems more severe for
goods with significant experience and
credence qualities
Consumer has difficulty in judging quality

Gov’t regulation
Approaches to Consumer Protection
None; laissez-faire: markets provide products
and information
1.
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Consumers: trial and error, word of mouth
Works best:
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Works poorly:
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Attributes easily judged/researched: taste, color
No health hazard: experimentation is harmless
Inexpensive and frequently purchased
Not easy to judge attributes
Hazardous products
Product is expensive and rarely purchased
Food? Computers?
Approaches to Consumer Protection
2. Rely on public actions, product liability
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No formal regulation: people can sue company for
damages
Works best:
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Clear cause and effect link between product and damage
Harm is permanent (evidence is stronger)
Speed of correcting problem is not crucial
Works poorly:
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Cause and effect is not clear (e.g. damage is 20 years
later)
Speed of correcting problem is important
Example: Liability of Drug Companies
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March, 2009
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Diana Levine (guitar player) sues Wyeth:
improper administration of injection
causes amputation of her arm
Vermont jury rules in favor of Levine,
awards $7 mill in damages
Supreme Court on a 6-3 vote allows
consumers to sue pharmaceutical
companies for side effects even if label
approved by FDA
Approaches to Consumer Protection
3. Use of Labels and Warnings
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Government lowers cost of acquiring info
Works best:
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Many consumers will use and benefit from info
Risk/other info can be communicated
effectively
Banning a product might be desirable but it is
not feasible (e.g. cigarettes)
Certain groups of consumers that are affected
can be easily identified (e.g. pregnant women)
Approaches to Consumer Protection
3. Use of Labels and Warnings
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Works poorly:
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Important characteristics of product are hard
to communicate
Risk is too high: society thinks decision
should not be left to consumer.
Approaches to Consumer Protection
3. Use of Labels and Warnings
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Works poorly:
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Important characteristics of product are hard
to communicate
Risk is too high: society thinks decision
should not be left to consumer.
Approaches to Consumer Protection
4. Minimum Quality Standards (banning certain
production processes)
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Aimed at eliminating hazardous/detrimental
products
Works best:
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Risk is difficult to communicate
Risk is too high
Problem needs quick response
Works poorly:
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Standards make products too costly
Society loses too much when product not available
Approaches to Consumer Protection
5. Gov’t research + info provision:
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Gov’t provides information on what are
better choices than others:
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nutritional guidelines
crash testing ratings
Gov’t research + info provision:
Overview of this Course
1.
Competition Policies (completed)
2.
Information Policies: information that is
presented to consumer
3.
Product Quality policies: health, safety,
quality
Consumer Protection
2. Information Policies
A.
Product Standardization and
Information Disclosure
B.
Regulation of Advertising and Selling
Practices
2. Information Policies
A.
Product Standardization and
Information Disclosure
B.
Regulation of Advertising and Selling
Practices
Product Standardization & Info Disclosure
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Increase amount of info to consumers
Consumers better able to make good
decisions
What is a good decision?
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Not whether a consumer buys a healthy cookie
or not, but whether he/she buys the cookie she
intended
Product Standardization & Info Disclosure
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Standardization for price comparisons:
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Fair packaging + labeling Act of 1966:
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Policy statement: provide packaging and labeling
that facilitates value comparisons
Regulates info presented to consumers
FDA published set or regulations covering
labeling and packaging
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Where should the label be?
Label
1.
Principal Display Panel (PDP):
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Largest label usually displayed in retail
packages
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2.
Rectangular: 1 whole side (cereal box)
Cylinder, 40% of side (stewed tomatoes)
Information Panel:
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Label immediately contiguous to the PDP
Label
Standardization and Info Disclosure
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Standardization for price comparisons:
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Example: quantity labeling (under Fair
packaging + labeling Act):
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Net quantity stated in uniform and prominent
location on package’s PDP
Net quantity clearly expressed in appropriate unit
of measure (e.g. milk in fluid oz, napkins in
counts)
Some countries mandate uniform package
sizes
Standardization and Info Disclosure
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Standardization for price comparisons:
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Price Standardization: unit pricing (state
laws)
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Question, which of the following is cheaper on a
per oz basis:
A. Large size: 25 oz for 53 cents OR
B. Regular size: 1.5 lbs for 49 cents?
Standardization and Info Disclosure
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Standardization for price comparisons:
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Price Standardization: unit pricing (state
laws)
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Example:
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Large size: 25 oz for 53 cents OR
Regular size: 1.5 lbs for 49 cents?
Large: 2.12 cents per oz
Regular: 2.04 cents per oz
Consumers don’t typically bring calculators to
the store
Standardization and Info Disclosure
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Quality disclosure (type of info disclosure):
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How good is product? Turns experience and
credence into search qualities
Four ways to do this:
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Ingredient/content labeling
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Performance
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Estimated MPG on new cars
Energy guides on new appliances
Grade rating, standards
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Clothing: fibers used
Organic labeling
Open dating
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Perishables
Grade Rating: Example
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Organic Foods Production Act, 1990: what
“organic” means
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Meat, poultry, eggs + dairy: animals not given
antibiotics or hormones, organic feed, outdoor
access.
Food: no pesticides, no synthetic fertilizers, no
genetic engineering.
“100% organic”: only organic ingredients
“Organic”: >95% organic ingredients
“Made with organic ingredients”: >70%
Organic Standards
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Prior to 1990 act:
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Producers were often not honest about
product
Consumers could not visually judge product
Rules varied from state to state.
Now:
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USDA label (only for 100% organic)
Credence attribute is now search attribute
Consumers can purchase what they
originally wanted