Promoting Consumer Welfare By Preventing Unfair Conduct

Transcription

1 Promoting Consumer Welfare By Preventing Unfair Conduct Timothy T. Hughes Office of International Affairs Federal Trade Commission Kuala Lumpur, Malaysia. September 23,

2 Many Countries Link Competition and Consumer Protection: Why? 2

3 Competition & Consumer Protection Share Goals The line drawn between competition & consumer protection laws is not always bright and clear The reason is because they both should share the promotion of economic efficiency and consumer welfare as their primary goals E.g., contracts... in restraint of trade violate Sherman Act, but contract rights need protection Market efficiency requires effective means to enforce private agreements. See, Farber, Contract Law & Modern Economic Theory, 78 Nw.U.L.Rev. 303,315 (1983)(remedy for breach of contract is necessary in order to ensure economic efficiency ) American Airline v. Wolens, 513 U.S.219 (1995) (challenging retroactive changes in frequent flyer rules) 3

4 Two Legal Instruments Protect Supply and Demand Competition Law: protects the Supply Side of the market from behavior that distorts What producers make, How much producers make, Cost of production, and Price at which producers sell. Consumer Protection: protects the Demand Side of the market from behavior that distorts What consumers buy, Price consumers pay, and Trade-offs of price, quality, reliability and safety that consumers make. 4

5 Consumer Welfare: Definition Consumer welfare refers to the individual benefits of goods and services. In theory, individual welfare is defined by an individual s own assessment of his/her satisfaction, given prices and income. Exact measurement of consumer welfare therefore requires information about individual preferences. In practice, applied welfare economics uses the notion of consumer surplus to measure consumer welfare. Glossary of Industrial Organization Economics & Competition Law, OECD

6 Competition Law Protects Supply of Goods That Satisfy Vigorous competition law enforcement: Fights cartels Fights abuses of dominance Prevents mergers that will raise prices, reduce innovation Competition law increases consumer satisfaction by: Lower prices Higher quality Greater innovation 6

7 Consumer Protection Law Protects Information & Trust Consumers Need To Demand What Satisfies Vigorous Consumer Protection fights: Fraud and Deception Unfairness Consumer Protection increases consumer satisfaction by: Dissemination of information needed to make choices that satisfy Educating consumers Building confidence in reliability of contracts, warranties and safety 7

8 Good Competition and Consumer Policy When Both Are Considered Good economics harmonizes consumer and competition policies. Examples: Comparative advertising: competition policy says permit comparisons; consumer policy says make comparisons truthful and complete Health claims for food: competition policy says permit them; consumer policy says consumers don t know and need someone with expertise to police claims 8

9 Bad Competition & CP Policy Is Result When They Are Divorced Competition law & policy applied without regard to consumer welfare goals causes long-term harm by, e.g., protecting inefficient producers Consumer protection law & policy applied without regard to consumer welfare goals causes long-term harm by, e.g., too much government intervention Divorced from each other they tend toward short-term fixes that cause longterm harm to the market 9

10 Some Government Intervention To Protect Can Be Harmful Examples Mandating quality: How does government know what is right quality? It limits competition on quality Overly restrictive advertising regulations like banning comparative advertising 10

11 Some Government Intervention To Protect Is Needed & Beneficial Indirect Benefit Makes claims made in the market more trustworthy Makes it easier for legitimate marketers to convey truthful information Direct Benefit Reduces injury to consumers from specific fraud Reduces incentives of sellers to engage in fraud or deception and threat of punishment deters actors 11

12 Unfairness The risk of causing harm by divorcing competition and consumer policy from each other is especially high when prohibiting something as vague as unfair acts Using consumer welfare as the ultimate standard removes pure subjectivity from deciding what is unfair 12

13 Protection From Unfair Conduct Overlap between competition & consumer protection occurs in conduct prohibited, especially in laws that prohibit: unfair acts or practices (US FTC Act) unfair trade practices (Japan) unfair business competition (Indonesia) unfair business practices (Korea) unfair competition (Vietnam) 13

14 Confusion Caused By Four Uses of Term Unfair Acts 1. Unfair Acts affecting producers traditional pure competition 2. Unfair Acts affecting producers beyond traditional pure competition 3. Unfair Acts that harm individual producer/competitors regardless of effect on consumers 4. Unfair Acts that harm consumers directly and producers indirectly traditional consumer protection 14

15 Types 1 & 2 Traditional & Beyond Traditional Unfair Acts - Pure Competition Traditional Unfair Acts Cartels and other agreements that harm consumer welfare; Abusive use of dominant power that harms consumer welfare; Mergers and acquisitions that harm consumer welfare Unfair Acts Beyond Traditional Invitation to agree to join cartel & fix prices 15

16 Type 3. Unfair Acts That Harm Individual Competitors and May or May Not Harm Consumers Acts that directly harm individual competitors and indirectly consumers Theft of trade secret allowing thief to produce product and bring down prices. Acts that directly harm both consumers and competitors False comparative advertising 16

17 Type 4. Unfair Acts That Directly Harm Consumers and Indirectly Harm Competitors Examples: Unsafe consumer products paint with lead Fraud Deception Failing to honor contract or warranty terms 17

18 FTC s Past Use of Type 3: Unfair Acts That Harm Individual Competitors and May or May Not Harm Consumers FTC Used To Consider Deceptive Advertising As Unfair Competition FTC Act originally intended as antitrust law, but FTC began to apply to deceptive advertisements because they harmed competitors (no clear understanding at the time of the difference between harm to competitors and harm to competition ). 18

19 Examples of Early FTC Cases Against Type 3 Unfair Acts Sears, Roebuck v. FTC, 285 F. 307 (7 th Cir. 1919) FTC sued Sears for falsely claiming that it sells sugar at lower prices than competitors because it buys in bulk, and has higher quality tea because it selects the tea specially. In fact, its sugar was cheaper only as a loss leader when purchased with other products, and 75% of Sears tea was available to competitors. FTC v. Winsted Hosiery, 258 U.S. 483 (1922) FTC sued company for deceptive name winsted which sounded like worsted, a type of wool when, in fact, the company sold cotton underwear, not wool underwear. This harmed true wool underwear sellers. 19

20 FTC Moves From Type 3 to Type 4 Unfair Acts* The additional burden of proving that the deception harmed competitors was difficult for FTC to meet. 1938: Wheeler-Lea Amendment to the FTC Act unfair and deceptive acts added to FTC Act, the basis of FTC consumer protection jurisdiction * Richard S. Tedlow, From Competitor to Consumer: The Changing Focus of Federal Regulation of Advertising, , Business History Review, 55:1 (Spring 1981), pp

21 Unfair Acts That Harm Individual Competitors and May or May Not Harm Consumers Are Now Private 1996: Federal Trademark Dilution Act Prohibits use of trademark in a way that tarnishes or blurs the distinctiveness of the mark. Not necessary to prove likelihood of confusion as with Trademark Infringement matters. 1946: Lanham (Trademark) Act Section 43(a), 15 U.S.C. 1125(a) is the basis for attacking use of trademarks with likelihood of confusion ; and Section 43(a)(1)(B) the basis for attacking false or misleading claims used in commercial advertising that are likely to harm plaintiff 21

22 Unfair Acts or Practices That Are Not Deceptive Ads FTC concern about unfair practices did not disappear. It shifted to focus on acts unfair to consumers rather than unfair to competitors. Deception is always unfair; but unfair is not always deceptive 1960s & 70s FTC approach to unfair acts was broad some thought too broad especially applied to unsafe products. E.g. children s advertising proceedings. In 1980 Congress said any rule on sugar in cereal would have to be based on deception, not unfairness. 22

23 Unfair Acts or Practices That Are Not Deceptive Ads (cont.) 1980s pure unfairness cases continue E.g., International Harvestor (1984)case about exploding gas tanks; Orkin Pest Control (1986)case about changes in long-term service contracts Amendment to FTC Act unfair act is one that: causes or is likely to cause substantial injury to consumers which is not reasonably avoided by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. 23

24 FTC Rules Regulating Unfair Practices Rules requiring disclosures because failure to disclose information needed for intelligent purchasing decisions are based on notion that failure to disclose is unfair Mail Order Rule Telemarketing Rule,

25 Structure of Enforcement Against Unfair Acts Federal Trade Commission FTC Act consumer rather than competitor focus State Attorneys General State Unfair and Deceptive Trade Practices consumer focus Private Plaintiffs Lanham Act, Section 43(a) competitor focus State Unfair and Deceptive Trade Practices Laws both consumer and competitor focus National Advertising Division of the Council of Better Business Bureaus competitor focus 25