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16 Δεκ 2012 (πριν από 4 χρόνια και 6 μήνες)

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Public Policy in Private
Markets

Information Policies

Announcements


5/1:


Last day of
classes


HW 7 due, will post soon


You will get exam 2 back, together with a
“tentative” grade



Tue, 5/8


Comprehensive final exam:


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


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


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


Recent article by Bollinger, Leslie and
Sorensen (2011):


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?


Inadequate Information Leads to:


Errors of Commission


Buy more than you would if you had complete
information (e.g. Starbucks?
Acai

berry)


Pre
-
purchase assessment is too favorable


Errors of Omission


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?







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?







Properties:


Important source of protein and vitamins (
B
-
complex

vitamins) and is a
complete protein
.
Naturally low in
fat

and
sodium
.


Result:


Purchasing decisions do not maximize
utility



Competition is somewhat harmed:


Some products are rewarded “too much” while
others are rewarded “too little”

Why Do Consumers Need Protection?

Information problems


Why may these problems be serious?


Types of goods/qualities:


Search: consumer can judge qualities by
inspection


E.g. tomato: color, size, etc.


Experience: quality can be judged post
-
purchase


E.g.: cell phone service by company X


Credence: can’t judge quality even after
purchase


E.g.: pesticide residues on certain products

Information problems



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


1.
None; laissez
-
faire: markets provide products
and information


Consumers: trial and error, word of mouth


Works best:


Attributes easily judged/researched: taste, color


No health hazard: experimentation is harmless


Inexpensive and frequently purchased


Works poorly:


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


No formal regulation: people can sue company for
damages


Works best:


Clear cause and effect link between product and damage


Harm is permanent (evidence is stronger)


Speed of correcting problem is not crucial


Works poorly:


Cause and effect is not clear (e.g. damage is 20 years
later)


Speed of correcting problem is important

Example: Liability of Drug Companies



March, 2009


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


Government lowers cost of acquiring info


Works best:


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


Works poorly:


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


Works poorly:


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)


Aimed at eliminating hazardous/detrimental
products


Works best:


Risk is difficult to communicate


Risk is too high


Problem needs quick response


Works poorly:


Standards make products too costly


Society loses too much when product not available


Approaches to Consumer Protection


5. Gov’t research + info provision:


Gov’t provides information on what are
better choices than others:


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


Increase amount of info to consumers


Consumers better able to make good
decisions


What is a good decision?



Not whether a consumer buys a healthy cookie
or not, but whether he/she buys the cookie she
intended

Product Standardization & Info Disclosure


Standardization for price comparisons:


Fair packaging + labeling Act of 1966:


Policy statement
:
provide packaging and labeling
that
facilitates value comparisons


Regulates info presented to consumers


FDA published set or regulations covering
labeling and packaging



Where should the label be?


Label

1.
Principal Display Panel (PDP):


Largest label usually displayed in retail
packages


Rectangular: 1 whole side (cereal box)


Cylinder, 40% of side (stewed tomatoes)

2.
Information Panel:


Label immediately contiguous to the PDP


Label

Standardization and Info Disclosure


Standardization for price comparisons:


Example: quantity labeling (under Fair
packaging + labeling Act):


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


Standardization for price comparisons:


Price Standardization:
unit pricing
(state
laws)


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


Standardization for price comparisons:


Price Standardization: unit pricing (state
laws)


Example:


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


Quality disclosure (type of info disclosure):


How good is product? Turns experience and
credence into search qualities


Four ways to do this:


Ingredient/content labeling


Clothing: fibers used


Performance


Estimated MPG on new cars


Energy guides on new
appliances


Grade
rating, standards


Organic
labeling


Open dating


Perishables

Grade Rating: Example


Organic Foods Production Act, 1990: what
“organic” means


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



Prior to 1990 act:


Producers were often not honest about
product


Consumers could not visually judge product


Rules varied from state to state.


Now:


USDA label (only for 100% organic)


Credence attribute is now search attribute


Consumers can purchase what they
originally wanted