Retail Consumer Protection as Household Stimulus

Authored By 
Rory Van Loo
Blog contributor 
Policy Fellow
May 12, 2015

American households will likely save over a thousand dollars on gas this year. This provides crucial relief to cash-strapped middle-income families. Yet gas is only about 5% of consumer spending. Which raises the question: could American families see similar relief in other areas of consumer spending?

Surprisingly, the answer is yes. As a start, with the right regulatory policies, the average family could eventually pay less on an array of mass retail goods—the type of items bought at Amazon, Walmart, and grocery stores.

To understand how such savings are possible, it is worth considering why gas prices went down. Once oil supplies increased significantly, gas prices dropped partly because they are so visible. Gas stations broadcast prices on billboards across America.  Television news programs even regularly discuss changes in gas prices. Gas stations not lowering their prices would risk losing business to competitors because consumers are informed and can easily compare prices.

Unlike gas stations, sellers of goods have a dizzying array of techniques for making it more difficult to compare prices. Brands from Dove to Corn Pops to Skippy have shrunk the size of the product while leaving packaging seemingly unchanged. Or the same products will have slight variations in name, size, or UPC code across stores. As anyone who has ever tried to buy a mattress can attest, this makes it time-consuming if not impossible to buy smartly.

When consumers do not compare prices effectively, a market failure results and sellers can charge more. We do not know exactly how much more. But there is empirical basis for concluding it may be a lot more. The leading study on these practices found that solely by making it more difficult to compare products online, such as by making descriptions more complicated, sellers could raise prices 6% to 9% above fully competitive prices. Others have found even higher price increases for an array of practices. If a 5% to 10% figure were applied to spending on mass retail goods, this would amount to between $600 and $1,200 annually for the median family

Despite these large amounts at stake, the main federal consumer agency charged with consumer protection in the area, the Federal Trade Commission (FTC), pays limited attention to such pricing practices. Indeed, unlike its consumer finance counterpart, the Consumer Financial Protection Bureau, the FTC does not operate a supervision program to regularly collect information from the institutions it regulates. This means that it is difficult for the FTC to make an empirically informed decision about whether retailers’ or manufacturers’ pricing practices exploit market failures and thus may be in need of regulation. Granted, the agency operates on a limited budget given that it must regulate large swaths of the economy. But the FTC should consider building at least a light-touch supervision program today so the agency can understand how sophisticated sellers of goods are operating on the inside, just as consumer financial regulators supervise large financial institutions. 

What types of rules might such supervision support? For a start, the mass retail goods sector is ripe for federal rules that would help give consumers the information they need to make better purchasing decisions. Nine states already require large retailers to post unit pricing on store shelves, enabling consumers to more easily compare deals. Millions of consumers would benefit from similar nationwide rules.

Also, there is no app that effectively helps consumers know which grocery store or mass retailer would offer the best deals. So, in other words, ideally you could enter your shopping list and receive a few itineraries to choose from, each with a list of store(s) to visit, estimated time, and the total cost including transportation. Start-ups have tried to make such an app, but retailers don’t have to share their in-store price information electronically, even though they could do so at low cost. A federal rule requiring large retailers to make their pricing and product information digitally available would thus enable the private sector to create a powerful shopping comparison app that would make markets more competitive.

In short, there is reason to believe that consumers could save on their goods purchases with better federal policies. Strong lobbying would resist any such effort. But market-driven savings are possible in areas of consumer spending other than gas.

Rory Van Loo’s research focuses on the relationship between the business sector and upward mobility, with an emphasis on regulatory design, bankruptcy, and commercial law. on consumer law. Van Loo received his J.D. from Harvard and is now a PhD student at Yale Law, and an ISPS Graduate Policy Fellow.

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