Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU ANNEX

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1 Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU ANNEX Final report Ipsos-London Economics-Deloitte consortium December 2015 Justice and Consumers

2 EUROPEAN COMMISSION Produced by Consumers, Health, Agriculture and Food Executive Agency (Chafea) on behalf of: Directorate-General for Justice and Consumers Directorate E Consumers Unit E.1 Consumer markets Contact: Marilena Di Stasi JUST-CONSULT-E1@ec.europa.eu European Commission B-1049 Brussels 2

3 EUROPEAN COMMISSION Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU ANNEX Final report Directorate-General for Justice and Consumers EU Consumer Programme ( ) 2015 EN

4 Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). This report was produced under the EU Consumer Programme ( ) in the frame of a specific contract with the Consumers, Health, Agriculture and Food Executive Agency (Chafea) acting on behalf of the European Commission. The content of this report represents the views of the Ipsos-London Economics-Deloitte consortium and is its sole responsibility; it can in no way be taken to reflect the views of the European Commission and/or Chafea or any other body of the European Union. The European Commission and/or Chafea do not guarantee the accuracy of the data included in this report, nor do they accept responsibility for any use made by third parties thereof. More information on the European Union is available on the Internet ( Luxembourg: Publications Office of the European Union, 2015 PDF ISBN doi: / DS EN-N European Union, 2015 Reproduction is authorised provided the source is acknowledged. 4

5 Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU CONTENTS ANNEX 1 MORE INFORMATION ABOUT THE LEGAL GUARANTEES REGULATORY ENVIRONMENT IN THE EU... 8 A1.1 Terminology around guarantees... 8 A1.2 The applicable EU legislation A1.3 State of play of the implementation of the legislation ANNEX 2 THE LEGAL GUARANTEE FOR SECOND HAND GOODS A2.1 Buying second hand goods A2.2 Informing consumers about the legal guarantee for second hand goods and its length ANNEX 3 VALUATION OF THE LEGAL AND COMMERCIAL GUARANTEE MARKET A3.1 Valuation of the paid-for commercial guarantee market A3.2 Valuation of the integral commercial guarantees market A3.3 Valuation of the legal guarantee market ANNEX 4 BEHAVIOURAL EXPERIMENT REGRESSION ANALYSIS ANNEX 5 REFERENCES ANNEX 6 METHODOLOGY A6.1 Literature review and stakeholder consultation A6.2 Price collection A6.3 Consumer survey A6.4 Mystery shopping exercise A6.5 Behavioural experiment design

6 Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU FIGURES Figure 1: Second hand goods bought in the past two years Figure 2: Information received from the seller: second hand good covered by a legal guarantee Figure 3: Information received from the seller: second hand good covered by a legal guarantee, by country Figure 4: Information received about the length of the legal guarantee period Figure 5: Step-by-step approach for data gathering Figure 6: Sample split by treatment Figure 7: Routing of respondents in choice experiment Figure 8: Guarantee choices for mobile phones in Round 1 (graphical display) Figure 9: Guarantee choices for mobile phones in Round 2 (graphical display) respondent chose No Guarantee in Round Figure 10: Guarantee choices for mobile phones in Round 1 (text display) Figure 11: Guarantee choices for mobile phones in Round 2 (text display) respondent chose Guarantee Pink in Round Figure 12: Guarantee choices for washing machines in Round 1 (graphical display) Figure 13: Guarantee choices for washing machines in Round 2 (graphical display) respondent chose Guarantee Pink in Round Figure 14: Guarantee choices for washing machines in Round 1 (text display) Figure 15: Guarantee choices for washing machines in Round 2 (text display) respondent chose Guarantee Purple in Round Figure 16: Sample splitting Figure 17: WTP intervals Figure 18: Mock manufacturer s guarantee A Figure 19: Mock legal guarantees for burden of proof test Figure 20: Respondent choices

7 Consumer market study on the functioning of legal and commercial guarantees for consumers in the EU TABLES Table 1: Burden of proof Table 2: Time limits on remedies Table 3: Time limits on rights Table 4: Freezing/reset of guarantee duration Table 5: Deviations from the Directive in the treatment of minor defects Table 6: Hierarchy of remedies Table 7: Sellers in the distribution chain whom the consumer has recourse to for a remedy Table 8: Estimated value of paid-for guarantees for brown, white and grey goods Table 9: Estimated value of paid-for guarantees for cars Table 10: Estimated value of 'realised value' for legal guarantees in m Table 11: Impact of information treatment on choice experiment performance Table 12: Impact of guarantee presentation treatment on choice experiment performance Table 13: Impact of guarantee complexity treatment on choice experiment performance Table 14: Impact of guarantee set on choice experiment performance Table 15: Impact of primary product price treatment on willingness to pay measures Table 16: Impact of commercial guarantee duration treatment on willingness to pay measures Table 17: Regression results: WTP measures against reasons for purchasing commercial guarantees: responses to Q14a Table 18: Regression results: WTP measures against reasons for not purchasing commercial guarantees: responses to Q14b Table 19: Choice of products and overview of selection criteria Table 20: Products grouped under Brown, White and Grey Goods and Cars Table 21: Data collected and instructions addressed to the native researchers Table 22: Total prices recorded by market agent and country Table 23: Average survey time Table 24: County and language Table 25: IIS and external panels Table 26: Sample size Table 27: Price range & products for mystery shopping exercise Table 28: Product specific features for mobile phones Table 29: Product specific features for washing machines Table 30: Commercial guarantee features Table 31: Choice modelling and contingent valuation Table 32: Contingent valuation methods Table 33: Price intervals shown to respondents in willingness to pay: washing machines Table 34: Price intervals shown to respondents in willingness to pay: mobile phones Table 35: Price distribution Table 36:Price sets, mobile phones, breakdown cover (monthly) Table 37: Price sets, washing machines, breakdown cover (annualised) Table 38: Respondent characteristics

8 Annex 1 More information about the legal guarantees regulatory environment in the EU A1.1 Terminology around guarantees In this section, the terminology around guarantees, followed by the relevant EU legislation, is explored. The key legal instrument applicable to consumer sales and related guarantees in the EU is the Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (hereafter the Consumer Sales Directive). 1 This Directive does not contain the notion legal guarantee (it refers instead to the seller s obligation to deliver the goods to the consumer which are in conformity with the contract of sale ) 2, and it only uses the term guarantee with reference to commercial guarantees. 3 The notions legal guarantee of conformity for goods and commercial guarantees are, however, used by the Commission s 2007 Report on the application of the Consumer Sales Directive, 4 as well as by Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights (hereafter the Consumer Rights Directive) 5 in the context of information requirements for contracts other than distance and off-premises contracts, as well as for distance and off-premises contracts. 6 The definitions of legal and commercial guarantees in this document follow the spirit of the Consumer Sales Directive and the other legal instruments mentioned below. The definition of legal guarantee contains the general obligation of conformity of consumer goods with the contract, and the definition of commercial guarantee simply follows the one in the Consumer Sales Directive. 7 Practically, however, the concept of commercial guarantee can also be subdivided, as explained below. Legal guarantee Also referred to as a statutory guarantee, the legal guarantee is a legally established obligation for sellers to deliver goods which comply with the contract of sale, resulting in a set of consumer remedies in cases of lack of conformity. 1 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees - Available at: 2 Ibid., Article This was done in order to prevent confusion in legal systems where the concept of a statutory or legal guarantee is unknown (See the Proposal for the Directive, COM (1995) 520 final). 4 The Commission s report on the application of the Consumer Sales Directive (2007) (Communication from the Commission to the Council and the European Parliament on the implementation of Directive 1999/44/EEC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees including analysis of the case for introducing direct producers liability, COM (2007) 210 final (Commission Report 2007) refers to legal guarantees when describing the consumer rights in cases of non-conformity with the contracts. 5 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council Available at: 6 Ibid., Article 5.1.e (contracts other than distance and off-premises contracts); Article 6.1.l-m (for distance and off-premises contracts). 7 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, O.J. L 171/12, Article 1.2.e. 8

9 Commercial guarantee without extra charge A commercial guarantee can be defined as an undertaking by a seller or producer to the consumer, given without extra charge 8, to reimburse the price paid or to replace, repair or handle consumer goods in any way if they do not meet the specifications set out in the guarantee statement or in the relevant advertising. It supplements the legal guarantee with additional services covered in case of product defect, but it cannot in any case diminish the coverage set by the legal guarantee. Both legal and commercial guarantees can be understood as integral guarantees, as the guarantee is inseparable from the product being sold. Other commercial guarantees, not of the above categories (paid-for guarantees) Although the Consumer Rights Directive covers all guarantees, none of the Directives define the concept of a paid-for guarantee which the consumer can voluntarily purchase in addition to those they receive by legal right or which the producer or manufacturer offers voluntarily (although they are captured under the stipulations of the Directives). There is also a confusing array of concepts and terms related to these guarantees (e.g. extended warranties, service contracts, care plans etc.), and new terms are introduced by firms on a regular basis. These products often resemble each other, but typically differ depending on whether the product is insurance-based or not. The issue of whether or not a commercial guarantee is insurance-backed has very real implications. 9 The rules on commercial guarantees in the Consumer Sales Directive give a great discretional margin to the seller and the manufacturer, while the market on insurance policy is, on the contrary, heavily regulated, thus reducing the seller s degree of freedom to specify the terms of the contract in the ways afforded with respect to commercial guarantees. 10 For the purposes of this study, the term paid-for commercial guarantee is used to reflect the fact that such guarantees are sold almost entirely in addition to singular products (i.e. the underlying product which is being guaranteed). This category is further divided into two sub-categories, being insurance and non-insurance based paid-for guarantees. The term paid-for guarantee is not mentioned in any of the literature cited. However, all references in this document to products such as extended warranties, care plans, service plans, extended service contracts etc. should always be read as meaning a paid-for guarantee for which the consumer has paid, rather than a legal or free commercial guarantee. 8 This stipulation of a guarantee being given without extra charge is in the Consumer Sales Directive but not the Consumer Rights Directive. 9 This will be examined via the stakeholder consultation with Insurance Regulators. 10 Ishida, C., Kaufman, P., Langrehr, F.W. and Pope, N. (2013). Extended Warranties and Insurance: Consumer Awareness and Perception. A white paper issued by The Katie School of Insurance and Financial Services. To give some idea of the additional regulation and oversight which can be incurred, consider the regulatory framework in the UK for extended warranties for Brown, Grey and White goods according to the Association of British Insurers. National regulatory conditions for the sale of such warranties are laid down in the Domestic Electrical Goods Order However, the following additional five guidance and regulations from the UK financial regulatory authorities (previously the Financial Services Authority, now Financial Conduct Authority and Prudential Regulation Authority) also apply: FSA Perimeter Guidance Manual (PERG), FSA Treating Customers Fairly (TCF) Initiative, the Insurance Conduct of Business Sourcebook (ICOBS), Senior Management Arrangements, Systems and Controls (SYSC), Dispute Resolution: Complaints (DISP). See Annex A of ABI (February 2011), Insured and Non-Insured Extended Warranties and Service Contracts, A Voluntary Good Practice Guide for Providers. 9

10 However, unless otherwise stated, the term commercial guarantee as a generic term should be read as encompassing any guarantee beyond the legal guarantee, regardless of whether it is a free commercial guarantee or a paid-for commercial guarantee. Terminology from other applicable legislation Although paid-for commercial guarantees (whether insurance-based or not) are covered by the Consumer Sales Directive, they are not specifically identified. Instead, the Directive refers to guarantees as undertakings given without extra charge. 11 However, as the Directive is a minimum harmonization measure, more protection and elaboration may be offered at the Member State level. 12 Furthermore, in common with guarantees given without extra charge, paid-for commercial guarantees cannot in any way diminish consumer rights deriving from the legal guarantee. 13 Besides the Consumer Sales Directive, the Consumer Rights Directive 14 also defines a commercial guarantee. This Directive includes the definition of commercial guarantees under the Consumer Sales Directive, but adds the following: Any undertaking by the trader or a producer (the guarantor) to the consumer, in addition to his legal obligation relating to the guarantee of conformity, to reimburse the price paid or to replace, repair or service goods in any way if they do not meet the specifications or any other requirements not related to conformity set out in the guarantee statement or in the relevant advertising available at the time of, or before the conclusion of the contract. 15 In addition, the Consumer Rights Directive also stipulates that the consumer should be made aware of the legal guarantee and the existence and conditions of commercial guarantees, whether paid-for or not. In addition to a reminder of the existence of a legal guarantee of conformity for goods, the existence and the conditions of after-sales services and commercial guarantees, where applicable. 16 Other EU Directives than the aforementioned ones apply to all business-to-consumer contracts, therefore to all guarantees. These are the Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-toconsumer commercial practices in the internal market (hereafter Unfair Commercial Practices Directive) 17 and the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (hereafter the Unfair Contract Terms Directive). 18 All these applicable EU measures are commented on in the following sections. 11 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, O.J. L 171/12, Article 1.1.e. 12 See directly below on the minimum harmonisation nature of the Directive. 13 Article 7.1 of the Consumer Sales Directive provides that any contractual terms or agreements concluded with the seller before the lack of conformity is brought to the seller's attention which directly or indirectly waive or restrict the rights resulting from this Directive shall, as provided for by national law, not be binding on the consumer. 14 Op. cit., Directive 2011/83/EU on consumer rights. 15 Ibid., Article Ibid., Article 5.1 (e) 17 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council. 18 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 95/29. 10

11 A1.2 The applicable EU legislation A1.2.1 Consumer Sales Directive The Consumer Sales Directive 19 is a minimum harmonisation measure thus allowing Member States to introduce more stringent rules for protecting consumers. 20 It covers contracts for sale of consumer goods as well as supply contracts for consumer goods to be manufactured or produced. 21 It is a contract law instrument: only final sellers are liable to consumers and persons higher in the distribution chain, such as wholesalers or manufacturers, are not liable under the Directive as they are not parties to the contract of sale with the consumer. However, the Directive also requires that redress is to be available to the final seller in case non-conformity was caused by another supplier higher in the supply chain or the producer. 22 Direct liability of producers has been mentioned in the Directive as a possibility for the future and examined in the Commission s report on the implementation of the Directive, but has not been introduced so far. 23 Consumer goods can be new or second hand goods. They are defined as all tangible movable items, excluding: goods sold by way of execution or otherwise by authority of law, water and gas which are not put up for sale in a limited volume or set quantity, and electricity. 24 It is also possible for Member States to exclude from the scope of application of the relevant provisions all second hand goods sold at public auction where consumers had the opportunity of attending the sale in person. 25 As mentioned above, the Directive regulates two types of guarantees with regard to sales of consumer goods: legal guarantees and commercial guarantees. 19 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, O.J. L 171/ Ibid., Article 8.2. Now amended by the Consumer Rights Directive which inserted Article 8a into the Consumer Sales Directive providing an additional obligation for traders requiring Member States which do decide to adopt more stringent provisions concerning: time limits for sellers liability (Article 5.1), presumption of non-conformity at the time of delivery if it became apparent within 6 months (Article 5.3), and the possibility for parties to agree to a shorter limitation period for sellers liability in case of second hand goods (not shorter than 1 year Article 7.1), to alert the Commission to this fact and to any future changes. For a detailed analysis of how Member States implemented the various provisions of the Directive, see Op. cit. Schulte-Nolke, H., Twigg-Flesner, C., Ebers, M. (2008), and Commission (2007) Green Paper on the Review of the Consumer Acquis of 8 February 2007, COM (2006) 744 final. 21 Ibid., Article Ibid., Article 4. Some Member States provide for liability of others in the supply chain and/or the producer (see the Commission Report 2007 footnote below, at pp ). 23 Ibid., Article 12. The Commission ought to present a report on the application of the Directive to the Council and the Parliament, including, inter alia, the case for introducing the producer's direct liability. The Report was submitted in No proposal for introducing direct producers liability has been adopted as yet. 24 With regard to electricity: Directives 2009/72/EC and 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market of electricity and gas and repealing Directives 2003/54/EC and 2003/55/EC apply (Annex) (OJ L 211/55 and L 211/94). 25 Op. cit., Directive 1999/44/EC, Article 1.3. This exclusion does not extend upon Internet auctions: Micklitz, H.W., Reich, N. (2014). Sale of Consumer Goods, in Reich, N., Micklitz, H.W., Rott, P., and Tonner, K. (2014). European Consumer Law, 2nd Edition, Intersentia, pp

12 Legal guarantee Meaning and scope of the seller s liability: The seller must deliver to the consumer goods which are in conformity with the contract of sale. 26 The Directive established a presumption of conformity where the following conditions are cumulatively present: (a) The goods comply with the description given by the seller and possess the qualities of the goods which the seller has held out to the consumer as a sample or model; (b) They are fit for any particular purpose for which the consumer requires them and which he made known to the seller at the time of conclusion of the contract and which the seller has accepted; (c) They are fit for the purposes for which goods of the same type are normally used; (d) They show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling. 27 Further, any lack of conformity resulting from incorrect installation of the consumer goods shall be deemed to be equivalent to lack of conformity of the goods if installation forms part of the contract of sale of the goods and the goods were installed by the seller or under his responsibility. This shall apply equally if the product, intended to be installed by the consumer, is installed by the consumer and the incorrect installation is due to a shortcoming in the installation instructions. 28 The Directive contains an exception from the seller s liability if, at the time the contract was concluded, the consumer was aware or could not reasonably have been unaware of the problem or if the problem was caused by materials supplied by the consumer. 29 Consumer remedies The Directive contains a catalogue of remedies for consumers if the goods do not conform to the contract as specified in Article 2. These are: repair 30, replacement 31, reduction in price, and rescission of contract. Instead of offering consumers free choice of remedy, however, it offers a two-tier system. 32 First of all, the consumer is entitled to repair or replacement free of charge 33, within reasonable time 34 and without a 26 Ibid., Article Ibid., Article 2.2. The seller will not, however, be liable for these public statements if he demonstrates that at the time of concluding the contract he was not aware, and could not reasonably have been aware of the statement, or at that time the statement was corrected, or the consumer s choice to purchase the goods could not have been influenced by the statement (the latter is an objective criterion, and thus it is irrelevant whether the consumer was in fact influenced by the statement or not) (Article 2.4). 28 Ibid., Article 2.5. The second sentence is the so-called IKEA clause. 29 Ibid., Article Ibid., Article 1.2.f. Defined as bringing consumer goods into conformity with the contract of sale. Article 3.2, 3.3 and 3.4 explain when repair and replacement are available. 31 Ibid. Recital 16. According to Recital 16, replacement will normally be impossible for second hand goods. 32 Not all Member States implemented this two-tier system. Some offer consumers a completely free choice of remedy: Greece, Lithuania, Portugal and Slovenia Commission s Report 2007, at p This notion concerns the costs of postage, labour and materials. The CJEU (Court of Justice of the EU) also held in Quelle that the consumer should not be required to reimburse the seller for the use of the goods since 12

13 significant inconvenience to the consumer, unless these remedies are impossible or disproportionate (the latter requires taking into account the value of the goods, how significant the lack of conformity is, and whether an alternative remedy can be offered without significant inconvenience to the consumer). 35 In Weber and Putz, the Court of Justice of the European Union (CJEU) held that one of the aspects of the seller s obligation to deliver goods conforming to the contract is the duty to reimburse any additional costs to the consumer for replacing a defective product and installing one without a defect. 36 If the consumer is not entitled to a repair or replacement, if the seller did not complete one of these remedies within reasonable time, or if he did not complete it without significant inconvenience to the consumer, the latter can ask for the price to be reduced or the contract to be rescinded. 37 The hierarchy of remedies does not need to be implemented by the Member States in line with the minimum harmonisation of the Directive the consumer may be given the right to choose from all four remedies at the same time. Time limits The seller is liable for non-conformity which became apparent within two years from delivery of the goods. 38 The Directive provides Member States the option to require the consumer to notify the seller of non-conformity within a period of no less than two months after discovering this lack of conformity, in order not to lose their rights. 39 Presumption of non-conformity Any lack of conformity which became apparent within six months from delivery is presumed to have existed in the goods at the time of delivery, unless such presumption is contrary to the nature of the goods or the nature of the non-conformity 40 This presumption is important because normally the burden of proof that the goods did not conform to the contract at the time of delivery rest with the consumer. Binding effect and consumer information The rights provided by the Directive cannot be excluded or limited by law or by a contractual arrangement (or by opting for the law of a third country). 41 The parties may, however, agree on other types of remedies or conditions after the non-conformity they were delivered until they were replaced C-404/06 Quelle AG v. Bundesverband der Verbraucherzentralen [2008] ECR I The Directive does not define what reasonable time means which can be problematic. The notion received various interpretations on the national level. 35 Article 3.3. Op. cit., Directive 1999/44/EC, 36 Joined cases C-65/09 and C-87/09 Gebr. Weber et al. v J. Wittmer et al. [2011] ECR I Op. cit., Directive 1999/44/EC, Article 3.5. The contract cannot be rescinded if lack of conformity is minor Article 3.6 (not all Member States implemented the latter exception: for instance Czech Republic, Estonia and the UK see Commission s Report 2007, at p. 8. Portugal has also not implemented this exception). If the consumer s claim for rescission is rejected because the lack of conformity is minor, Member State laws cannot prevent the consumer from claiming price reduction instead (C-33/12 Soledad Duarte Hueros v. Atoiciba et al. [2013]). 38 Ibid., Article Ibid., Article 5.2. The Commission s Report 2007 provides that 16 Member States used this option or a variation of it. Communication from the Commission to the Council and the European Parliament on the implementation of Directive 1999 / 44 / EC of the Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees including analysis of the case for introducing direct producer s liability, Brussels, , COM(2007) 210 final, p.9 40 Op cit. Directive 1999/44/EC, Article Op cit., Directive 1999/44/EC, Article 5.3. Article 7.1 and

14 was brought to the seller s attention. 42 Member States can also provide that, in the case of second hand goods, the seller and consumer may agree contractual terms or agreements which have a shorter time period for the liability of the seller than that set down in Article 5(1) (no less than one year). 43 The Directive establishes an obligation for Member States to inform the consumers of the national law transposing this Directive and to encourage, where appropriate, professional organisations to inform consumers of their rights. 44 This obligation was implemented in different ways, for instance in Poland the text of the applicable law had to be displayed in every shop. Commercial guarantees There is no obligation for sellers to provide consumers with additional guarantees, but the Directive does introduce requirements for such guarantees once they are provided. Article 6.1 makes it clear that suppliers are bound by the guarantee statement as well as the advertising concerning the guarantee. The rest of the provision contains requirements concerning the contents of the guarantee: it should provide information on the existing legal rights for consumers and on the fact that the guarantee does not affect these rights; it should set out in plain intelligible language the contents of the guarantee and the essential particulars necessary for making claims under the guarantee, notably the duration and territorial scope of the guarantee as well as the name and address of the guarantor ; and at the consumer s request it should be available in writing or on another durable medium available and accessible to him. 45 Member States may also introduce language requirements for guarantee documents. 46 While the Directive provides that, in cases of breaches of requirements, the guarantee is still binding and can be used by the consumer, it establishes no other remedy for consumers. A1.2.2 The Consumer Rights Directive The Consumer Rights Directive 47 enhances the protective effect of the requirements contained in the Consumer Sales Directive. It contains information requirements both for contracts which are not distance or off-premises contracts (so called on-premises contracts), and for distance and off-premises contracts. Its scope of application is wider than in the Consumer Sales Directive. It covers goods (defined as all tangible, movable items excluding those sold by way of execution or otherwise by authority of law and water, gas and electricity unless they are put up for sale in limited volumes or set quantities) 48 and services. It also applies to digital content, which is defined as data produced and supplied in digital form Micklitz, H.W. and Reich, N. (2014), Sale of Consumer Goods, in N. Reich, H.W. Micklitz, P. Rott and K. Tonner, European Consumer Law, 2nd Edition, Intersentia, p Op cit., Directive 1999/44/EC, Article 5.3. Article 7.1. See Commission Report 2007 on the list of countries that adopted this exception (at p. 10). 44 Ibid., Article Ibid., Article 6.2 and Ibid., Article Directive 2011/83/EU of the European Parliament and of the Council on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council, OJ L 304/ Ibid., Article Ibid., Article

15 The Consumer Rights Directive also provides consumers with the right to withdraw, without giving reasons for doing so, from distance and off-premises contracts. 50 Consumers can withdraw (by using a withdrawal form provided in Annex I(B) of the Directive or by making another unequivocal statement setting out their decision to withdraw) within 14 days from the conclusion of contract (in the case of service contracts) or from the day when the consumer or a third party indicated by the consumer acquires possession of goods (in the case of contracts of sale). The withdrawal should not cause any costs for the consumers, apart from those provided for article 13.2 and 14 of the Directive 51. Accordingly, Article 14 provides that the consumer will have to bear the direct costs of returning the goods to the trader unless the trader has agreed to bear them or unless he has failed to inform the consumer that these costs are to be paid by the latter. Thus, in some cases it might be more straightforward and faster for the consumer to withdraw from the contract (as long as it was a distance or an off-premises one) using the Consumer Rights Directive, instead of utilising his guarantee rights. However, the consumer might need to bear the direct costs of returning the goods. For contracts other than distance or off-premises contracts, article 5 states that the trader must provide in a clear and comprehensible manner to the consumer, before the contract or offer become binding, information concerning (among other issues) the main characteristics of the goods or services, the identity of the trader (name, geographical address and phone number), as well as a reminder of the existence of a legal guarantee of conformity for goods and information on the existence and conditions of any after-sales service or commercial guarantees. 52 Article 6 contains information requirements for distance and off-premises contracts. The information must also be provided in a clear and comprehensible manner before the consumer is bound by the contract or offer, and must concern (among other issues): the main characteristics of the goods and services, the identity of the trader (name, geographical address, telephone numbers, fax numbers and addresses), the reminder of the existence of a legal guarantee of conformity for goods and information on the existence and conditions of any after-sales service or commercial guarantees. 53 These information requirements enhance consumer protection in the context of legal and commercial guarantees: they entail the need for clarity with regard to what exactly the characteristics of the goods are (to facilitate establishing what the contract entails for the purposes of ascertaining conformity of the goods with it). They ensure that clear information about the trader (where to address complaints) is provided. They also reiterate the duty to inform of the existence of a legal guarantee of conformity, and introduce the duty to inform about the existence and conditions of other guarantees. 50 Ibid., Chapter III, Consumer Information and right of withdrawal for distance and off-premises contracts: Articles Ibid., Chapter III, Article Ibid., Article 5.1.a, 5.1.b, and 5.1.e. 53 Ibid., Article 6.1.a-d, 6.1.l, 6.1.m. 15

16 A1.2.3 The Unfair Commercial Practices Directive The Directive on Unfair Commercial Practices 54 sets uniform rules across the EU and introduces a prohibition of commercial practices which are contrary to the requirements of professional diligence and are capable of distorting the economic behaviour of consumers. It offers a definition of an unfair practice, 55 and deals in detail with two of its most prevalent examples: a misleading actions and an aggressive commercial practice. 56 The Directive applies to business-to-consumer commercial practices taking place before, during and after a commercial transaction relating to a product. It can apply in the context of legal and commercial guarantees, to direct communications with traders as well as to the content and form of advertising: practices enticing consumers to purchase goods, misleading them as to the characteristics of those goods and other important elements of the contractual arrangements, or as to the contents of guarantee obligations of the seller or producer. In fact, Article 6.1.g concerning misleading actions expressly refers to misleading information concerning consumer rights, including the right to replacement or reimbursement under the Consumer Sales Directive. The Directive also introduces information duties which enhance the position of a consumer before concluding a transaction: Article 7.4 (in conjunction with Article 7.1) requires all material information to be provided in invitations to purchase: including the main characteristics of the product and the identity and address of the trader. Annex I contains practices that have been blacklisted as always unfair. Two of these refer directly to guarantees and warranties: (8) undertaking to provide after-sales service to consumers with whom the trader has communicated prior to a transaction in a language which is not an official language of the Member State where the trader is located, and then making such service available only in another language without clearly disclosing this to the consumer before the consumer is committed to the transaction, and (23) creating the false impression that after-sales service in relation to a product is available in a Member State other than the one in which the product is sold. The Directive also may find application in the after-sales stages, where consumers are attempting to realise one of the remedies provided by the Consumer Sales Directive or where they are seeking to enforce guarantee promises. A1.2.4 The Unfair Contract Terms Directive The Directive on Unfair Contract Terms 57 provides minimum protection rules against significantly unbalanced contract terms. It applies to terms which are not individually negotiated 58 in contracts between sellers or suppliers and consumers. Terms which are unfair cannot bind consumers. 59 The Annex contains a grey list of terms which may be presumed as unfair 60. The Directive finds application in the context of guarantees. It 54 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council. Available at: 55 Ibid., Article 5.2. (a) and (b) 56 Ibid., Articles Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. 58 Ibid., Article Ibid., Article 3.1 defines an unfair term. Article 6 lack of binding effect of unfair terms. 60 Annex "Terms referred to in Article 3 (3)". 16

17 enables an assessment of contractual terms, also those concerning consumer rights and the obligations of sellers (including rights and duties with regard to conformity of goods with the contract, remedies for non-conformity, and any guarantee obligations). The Annex lists the following clauses which may be unfair (and which can be applicable to both legal and commercial guarantees): (b) inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, (m) giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, (p) giving the seller or supplier the possibility of transferring his rights and obligations under the contract, where this may serve to reduce the guarantees for the consumer, without the latter's agreement, and (q) excluding or hindering the consumer's right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract 61. A1.3 State of play of the implementation of the legislation In this section, the state of play of the legislation is highlighted, in relation to: The burden of proof; Time limits on remedies; Time limits on rights; Freezing/reset of guarantees; Defect severity; Conformity; Hierarchy of remedies; Seller liability; Additional rights. A1.3.1 Burden of proof The concept of the burden of proof with respect to the legal guarantee specifies who must prove that the good was defective or non-conforming. This is an important point because the party who is responsible for proving the defect or non-conformity may face the cost of hiring (potentially expensive) expert opinion to support their position within an ADR mechanism or court. 61 Op.cit. Annex "Terms referred to in Article 3 (3)". 17

18 Table 1: Burden of proof Burden of Third Party can assist? Third party assessment recognised legally? proof on seller 1. Austria First 6 months At consumer s discretion Not necessarily 2. Belgium First 6 months At consumer s discretion Not necessarily 3. Bulgaria First 6 months At consumer s discretion Not necessarily 4. Croatia First 6 months At consumer s discretion Not necessarily 5. Cyprus First 6 months At consumer s discretion Not necessarily 6. Czech Republic First 6 months Ministry of Justice has a list of experts whom the consumer can pay 7. Denmark First 6 months Many Danish ADRs can request an opinion from their own list of experts 8. Estonia First 6 months At consumer s discretion. There are specialist bureaus that can provide opinion. Yes, consumer may be able to claim costs back Yes, by ADR Not necessarily 9. Finland First 6 months At consumer s discretion Not necessarily 10. France 2 years as of At consumer s discretion Not necessarily March Germany First 6 months At consumer s discretion Not necessarily 12. Greece First 6 months At consumer s discretion Not necessarily 13. Hungary First 6 months Ministry of Justice has a list of experts whom consumer can pay 14. Iceland First 6 months At consumer s discretion Not necessarily 15. Ireland First 6 months At consumer s discretion Not necessarily 16. Italy First 6 months At consumer s discretion Not necessarily 17. Latvia First 6 months Latvian Consumer Rights Protection Centre has a list of experts whom the consumer can pay 18. Lithuania First 6 months The Inspectorate for Non-Food products can assist. Other experts at consumer s discretion. 19. Luxembourg First 6 months At consumer s discretion Not necessarily 20. Malta First 6 months Independent expert opinion is mandatory and Yes, by ADR an expert can be appointed by the Consumer Claims Tribunal 21. Netherlands First 6 months At consumer s discretion Not necessarily 22. Norway First 6 months At consumer s discretion Not necessarily 23. Poland 1 year Regional trade inspectorates and courts have lists of experts. Other experts at consumer s discretion. 24. Portugal 2 years At consumer s discretion Not necessarily 25. Romania First 6 months At consumer s discretion Not necessarily 26. Slovakia First 6 months At consumer s discretion Not necessarily 27. Slovenia First 6 months The Ministry of Justice has an official list of Yes experts. 28. Spain First 6 months At consumer s discretion Not necessarily 29. Sweden First 6 months At consumer s discretion Not necessarily 30. UK First 6 months At consumer s discretion Not necessarily Yes If the expert confirms the defect, the trader must reimburse the expert cost along with the claim. Not necessarily Yes 18

19 Regarding the state of play across the EU28, plus Norway and Iceland, only three countries have deviated from the minimum six month burden of proof reversal (i.e. for the first six months the burden is on the seller, while thereafter the burden is on the consumer). These countries are: Poland which has a one year burden of proof Portugal which has a two-year burden of proof France which is introducing a two-year burden of proof as of March 2016 In relation to providing proof that a good is (not) defective, most countries have not provided any specific mechanism in terms of sourcing expert opinion. In all countries, a consumer is freely able to source expert opinion at their own discretion and cost, but in no country is the consumer s or seller s choice of expert automatically accepted either by an ADR or formal court process. The evidence provided may or may not be accepted by the ADR or court in question, depending on its disposition. However, in eight of the countries covered, there are either experts who are recognised as independent or there is a state body which can be approached 62. Additionally, in Malta, expert opinion is mandatory for the ADR mechanism and the expert will be appointed by the ADR. A1.3.2 Time limits on remedies Time limits on remedies can be construed as both the limitations on the notification of the defect (as failure to abide by this will lead to loss of the guarantee rights) as well as the time limit to enact the remedy. As can be seen from the next table, there is great ambiguity across the 30 countries in this regard. Although many countries have adopted the approach of two months, many others have used the concept of within a reasonable period. For many other countries there is no practical limit other than that of the term of the legal guarantee in that jurisdiction. This represents an outward strengthening of the consumers legal rights. However, there is often also no actual deadline for the seller to implement a solution, or the same concept of within a reasonable period. Presumably, each country or claim relies on a benchmark practice which is not defined in legislation but which is considered reasonable. One factor which may complicate the time limit for remedies is whether the country has introduced the legal guarantee to cover immovable property. While most remedies (repair, replace or refund) for basic retail transactions could be expected to enacted quickly, immovable property may involve real estate transactions, in which case a 30-day limit may not be feasible (for example, if major reconstruction work was to be carried out). In certain countries (Belgium and Germany), it is recommended the parties fix a deadline and to move to a refund solution if the deadline is not met. In Lithuania a 15 day limit for refund is applied, if repair or replacement is not achieved. 62 These member States are: Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and Slovenia. 19

20 Table 2: Time limits on remedies Notification to seller Deadline on implementation 1. Austria 2 years from delivery of the good No deadline for implementing a solution 2. Belgium Within 2 months of noticing defect No deadline for implementing a solution Bulgaria Within 2 months of noticing defect One month 4. Croatia Within 2 months of noticing defect No deadline for implementing a solution 5. Cyprus Within 2 months of noticing defect No deadline for implementing a solution 6. Czech Republic 3 years from delivery of good 30 days 7. Denmark Within a reasonable period Within a reasonable period 8. Estonia Within 2 months of noticing defect No deadline for implementing a solution 9. Finland Within a reasonable period No deadline for implementing a solution 10. France 2 years from delivery of the good No deadline for implementing a solution 11. Germany 2 years from delivery of the good Can vary, but should be fixed between the parties 12. Greece 2 years from delivery of the good Within a reasonable period 13. Hungary Within 2 months of noticing defect 15 days 14. Iceland 2 years from delivery of the good No deadline for implementing a solution 15. Ireland 6 years from delivery of the good No deadline for implementing a solution 16. Italy Within 2 months of noticing defect No deadline for implementing a solution 17. Latvia Within 2 months of noticing defect 30 days 18. Lithuania 2 years from delivery of the good Reasonable time frame or 15 days for refunds 19. Luxembourg 2 years from delivery of the good One month 20. Malta Within 2 months of noticing defect Within a reasonable period 21. Netherlands Within a reasonable period (e.g. 2 months) No deadline for implementing a solution 22. Norway Within a reasonable period (e.g. 2 months) No deadline for implementing a solution 23. Poland 2 years from delivery of the good No deadline for implementing a solution 24. Portugal Within 2 months of noticing defect 30 days 25. Romania Within 2 months of noticing defect 15 days 26. Slovakia 2 years from delivery of the good 30 days 27. Slovenia Within 2 months of noticing defect 8 days 28. Spain Within 2 months of noticing defect No deadline for implementing a solution 29. Sweden 3 years from delivery of good Within a reasonable period 30. UK 6 years from delivery of the good (5 in Scotland) No deadline for implementing a solution A1.3.3 Time limits on rights In terms of the legal guarantee duration, there are three defining groups overall: Countries which have a minimum time limit on new goods greater than stipulated by the Directive; Countries which have a minimum time limit on second hand goods greater than stipulated by the Directive; Countries which have exceeded the minimum time limit on deadlines to take the matter to court. Seven countries have a legal guarantee which exceeds that of the minimum established by the Directive: Finland, Iceland, Ireland, the Netherlands, Norway, Sweden and the UK. However, the underlying rationale for these greater lengths of protection are different. In the case of the UK and Ireland, it comes from the treatment of the guarantee as a matter of contract law which pre-dated the Directive. In the case of Iceland, Norway and the Netherlands, there is a more explicit linkage of the guarantee with the expected lifespan of the product. 63 But it is recommended to agree a deadline, see ECC-Net county fiche for Belgium, available at: _GUARANTEE/country_fact_sheets/Country_fiche_BE.pdf 20

21 Romania has adopted the same concept, but in reverse. Instead of lengthening the guarantee, it has shortened it on the basis that some products may not be expected to last two years. This is a reasonable deviation considering that it could be applied to perishable food products (which strictly speaking, are captured by the Directive, but in practice are ignored). Far more countries have maintained the two-year minimum guarantee for second hand goods (the Directive gave the option to reduce this to one year). There are 16 countries which have chosen to do this, including: Bulgaria, Denmark, Estonia, Finland, France, Greece, Iceland, Ireland, Latvia, Lithuania, Malta, the Netherlands, Norway, Spain, Sweden and the UK. This appears to be a direct application of the legal guarantee to second hand goods in the same way as it is applied to new goods (i.e. both categories treated equally). However, when considering the deadline in which to take disputes to court (i.e. assuming a failure of the ADR process) there is a lot of variation. Only eight countries of the 30 maintain a limitation which is based on the overall guarantee duration (i.e. the time limit to escalate the process to court is the same as the legal guarantee itself). For the other countries, the consumer s rights are more expansive. Rather than limiting the duration of time from the date of the purchase of the good, the time limit for escalating to the court process may be linked to: Delivery of the good; Discovery of the defect; Notification of the defect to the seller; When the claim is made; A statutory right (i.e. one that is not linked directly to the guarantee). Sometimes these approaches only offer a slight advantage to the consumer. The difference between purchase and delivery may only be a matter of days or weeks for most purchases (though it could be much longer). However, when it is linked to discovery of the defect, notification to the seller or the claim, then there is a significant time advantage for the consumer, as these actions may occur in the final period of the legal guarantee (even on the final day). Although there may be other stipulations for the defect to be notified to the seller within a reasonable period of its appearance, in reality there may not be any proof of this other than the consumer s own word on the matter. After the initiating action in the claim process (claim, notification etc.), the time limit to take the matter to court ranges from two extra months (Italy, which offers 26 months from delivery of the good) to 10 years (Sweden, which offers 10 years from the delivery of the good). However, the most common extended duration is 3 years (from delivery, discovery of defect or from claim). 21

22 Table 3: Time limits on rights New goods Second hand goods (actual or mutually agreed) Deadline to take matter to court (excluding any suspension of statutory limitation) 1. Austria 2 years 1 year 2 years for new goods, 1 year for second hand 2. Belgium 2 years 1 year 2 years for new goods, 1 year for second hand 3. Bulgaria 2 years 2 years 2 years 4. Croatia 2 years 1 year 2 years for new goods, 1 year for second hand 5. Cyprus 2 years 1 year 2 years for new goods, 1 year for second hand 6. Czech Republic 2 years 1 year 3 years from when claim is made 7. Denmark 2 years 1 years 3 years from when claim is made 8. Estonia 2 years 2 years 3 years from delivery of the good 9. Finland Expected Expected 3 years from discovery of defect lifespan lifespan 10. France 2 years 2 years 2 years from delivery of good 11. Germany 2 years 1 year 2 years for new goods, 1 year for second hand 12. Greece 2 years 2 years 2 years from delivery of good 13. Hungary 2 years 1 year 2 years from delivery of good 14. Iceland 2 years, 5 years if longer lifespan 2 years, 5 years if longer lifespan 15. Ireland 6 years 6 years 6 years from delivery of goods 16. Italy 2 years 1 year 26 months from the delivery of the good 17. Latvia 2 years 2 years 2 years 18. Lithuania 2 years 2 years 2 years 19. Luxembourg 2 years 1 year 2 years for new goods, 1 year for second hand 20. Malta 2 years 2 years 2 years from delivery of the good 21. Netherlands Expected lifespan 22. Norway 2 years, 5 years if longer lifespan Expected lifespan 2 years, 5 years if longer lifespan - 2 years from the date the seller was notified of the defect 3 or 5 years from the delivery of the good 23. Poland 2 years 1 year 2 years, or 1 year from the date the consumer becomes aware of the defect ( which could amount to 3 years). 24. Portugal 2 years 1 year 2 years for movable goods, 3 years for immovable goods 25. Romania 2 years, shorter if lower lifespan 1 year 3 years from discovery of the defect 26. Slovakia 2 years 1 year 3 years from date the seller is notified of the defect 27. Slovenia 2 years 1 year 2 years from date the seller is notified of the defect 28. Spain 2 years 1 year 3 years from delivery of the good 29. Sweden 3 years 1 years 10 years from the delivery of the good UK 6 years (5 in Scotland) 6 years (5 in Scotland) 6 years (5 in Scotland) 64 Source: ECC-Net fact sheet for Sweden (undated), available at: consommateurs.eu/fileadmin/user_upload/eu-consommateurs/pdfs/pdf_en/report- _GUARANTEE/country_fact_sheets/Country_fiche_SE.pdf 22

23 A1.3.4 Freezing/reset of guarantee duration Regarding the freezing or reset of guarantee duration, the practice appears to fall mainly into two approaches: Where the guarantee is renewed for either a repair, replacement or both. Where the guarantee is not renewed, but the time spent in the execution of the remedy or claim process is added to the legal guarantee period. These approaches appear to be mostly mutually exclusive (which is intuitive, considering that one approach confers a significantly large legal guarantee period to consumers, so adding additional time for the remedy process may be considered unnecessary), except in the case of Spain. There are a number of countries where it is unclear whether the remedy execution process is added to the guarantee duration or not. For some other countries, there is no explicit rule on whether the repaired or replaced product is covered by a new guarantee or not. The gap between both approaches is of course highly significant to the overall balance between consumer or seller obligations. A remedy execution period may be relatively short, and in some countries this is stipulated specifically (see time limits on remedies above). However, if a repaired or replaced product receives a new guarantee, this clearly is to the advantage of the consumer as it gives a minimum of two years of new coverage. Some countries have restricted the new guarantee to replacement only (Hungary and Germany, the latter of which only guarantees the replaced components and not the overall good). Table 4: Freezing/reset of guarantee duration Guarantee duration suspended for remedy process? 1. Austria No, the repaired/replaced item has a 2-year Yes guarantee 2. Belgium Yes, extension by the time spent executing the No remedy 3. Bulgaria Yes, extension by the time spent executing the No remedy 4. Croatia No, the repaired/replaced item has a 2-year Yes guarantee 5. Cyprus Yes, extension by the time spent executing the No remedy 6. Czech Republic Not explicit/not specified No 7. Denmark No, the replaced item has a 2-year guarantee; the Yes repaired item a 3-year guarantee for the same defect 8. Estonia No, the repaired/replaced item has a new 2-year Yes guarantee 9. Finland Unknown No explicit rule 10. France Yes, if immobilisation longer than 7 days No explicit rule Repaired or replaced product covered by new guarantee? 11. Germany Unknown Although the law does not define this practice explicitly, it appears that after a replacement, the consumer can claim legal guarantee rights for 2 years. In the case of a repair, the legal guarantee is only extended with regard to the repaired or exchanged parts. 12. Greece No, the repaired/replaced item has a 2-year Yes guarantee 13. Hungary Yes, for repair. For replacement (good or spare Yes, but only for replacement part), it starts a 2-year guarantee 14. Iceland No, the repaired/replaced item has a 2-year Yes guarantee 15. Ireland Unknown No 23

24 Table 4: Freezing/reset of guarantee duration 16. Italy Yes, extension by the time spent executing the remedy However, if the products is repaired/replaced after the expiry of the guarantee, then the product enjoys a new guarantee (this could occur for example if a claim is underway, for example in court, where there is a 26 month limit to bring a claim following delivery of the good). 17. Latvia Yes, extension by the time spent executing the No remedy 18. Lithuania Yes, extension by the time spent executing the No remedy 19. Luxembourg Yes, extension by the time spent executing the No remedy 20. Malta Yes, extension by the time spent executing the No remedy 21. Netherlands Yes, extension by the time spent executing the No remedy 22. Norway Yes, extension by the time spent executing the No remedy 23. Poland Unknown for repair. For replacement, it starts a 2- Yes year guarantee 24. Portugal Yes, for repair. For replacement, it starts a 2-year Yes guarantee 25. Romania Unknown No 26. Slovakia Unknown for repair. For replacement, it starts a 2- Yes year guarantee 27. Slovenia Unknown for repair. For replacement (good or Yes spare part), it starts a 2-year guarantee 28. Spain Yes, extension by the time spent executing the Yes, but only for replacement repair 29. Sweden Unknown No explicit rule 30. UK Yes, extension by the time spent executing the remedy No explicit rule A1.3.5 Defect severity The Directive gives the seller the right not to respond to minor defects. In the main, most countries in the scope of this study have followed suit, and only a few expand on the consumer s rights in this regard. The table below lists seven countries which have referred to the concept of a minor defect either in their legislation or in practice. Four of these countries have a formal approach, i.e. a specific approach to dealing with minor defects is elaborated. Table 5: Deviations from the Directive in the treatment of minor defects Formal approach? Method 1. Czech Republic Yes In case the defect is minor, the consumer may only ask for repair or replacement 2. Germany Yes According to a court case, the defect is not considered minor if the remedy for the defect would cost in excess of 5% of the purchase price. 3. Ireland Yes In case the defect is minor, the consumer may only ask for repair or replacement 4. Portugal No The concept of minor defect has not been transposed. 5. Sweden No The consumer may cancel the purchase (and be refunded if having already paid) if the defect is of significant importance to the consumer. 6. UK No Consumer Rights Act 2015 Part 1 Chapter 2 Section 19(1) has a phrase freedom from minor defects when considering product quality, however it is unclear to what extent this is applied as a valid defect, or what constitutes minor. In two countries (the Czech Republic and Ireland), a straightforward approach is used the consumer may request only repair or replacement in the event of a minor defect and refund is not an option. 24

25 In Germany, the fourth country to have a formal approach to minor defects, a relevant court judgement has established that a defect is not minor if the remedy to this defect would cost more than 5% of the purchase price of the good. In Portugal, Sweden and the UK, the concept of minor defect and the relevant remedy is quite varied. In Portugal, the concept of minor defect has not been transposed, which theoretically means the consumer could request a remedy on any defect (it is unclear if there are established practices which mitigate this more expansive regime). In Sweden, the consumer has broad discretion with respect to minor defects. According to Swedish legislation, the consumer may decide whether a defect has a significant importance to himself, which effectively means any defect can be considered to be a major defect. In the UK, with additional reference to the satisfactory quality of a good, the term quality is defined in Part 1, Chapter 2, Section 9 of the Consumer Rights Act 2015 in ways that mirror the Directive s provision but going somewhat further with Section 9(3) which asserts that the quality of a good includes its state and condition. This section goes on to provide a (nonexhaustive) list of aspects of goods which must be taken into account when assessing goods quality, including freedom from minor defects. A1.3.6 Conformity In Article 2 Directive 1999/44/EC states that consumer goods are presumed to be in conformity with the contract if they: (a) comply with the description given by the seller and possess the qualities of the goods which the seller has held out to the consumer as a sample or model; (b) are fit for any particular purpose for which the consumer requires them and which he made known to the seller at the time of conclusion of the contract and which the seller has accepted; (c) are fit for the purposes for which goods of the same type are normally used; (d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling. These can be interpreted as four basic principles: The integrity of the advertising or presentation (a and d); Fitness for purpose based on the consumer s expressed need (b); Fitness for purpose benchmarked against similar good categories (c); Quality and performance benchmarked against similar good categories (d); Some countries have chosen to expand on these principles to some extent, for example by making reference to specific measures of quality, explicitly linking their regulations to other regulations on health and safety or encompassing components of the product. Cyprus is an example of a country which has decided to expand the concept of quality to cover all of these examples. The quality of goods, under the article 4(3) of Law N. 7(I)/2000, therefore includes the following: 25

26 Availability of spare parts, accessories and specialized techniques, where required; Safety of goods, as defined in Article 2 of Security on Consumer Products Laws of and Regulations issued thereunder, 74 (I) of (I) of (I) 1998; Reasonable durability and use; Appearance and finishing, and; Absence of defects. In the Czech Republic, quality is linked to both durability and performance. The definition of guarantee is transposed in 2113 NCC as a guarantee of the seller for the quality of the product, i.e. that it will be eligible for a certain period of time to be used for the usual purpose or that it will maintain its normal properties. Similarly, Finland also specifies that the good is to be packaged properly in order to preserve its content, and introduces the idea that the good is to comply with the general perception of duration for such a good. Goods are furthermore to comply with requirements put forth in law, regulation or decisions by public authority, unless the intent of the consumer is to use the good in such a way that the requirements are irrelevant. Norway and Sweden also make reference to packaging. Norway makes reference to packaging in its Consumer Sales Act (LOV ) 15 where it was written that: The good shall be in accordance with the requirements of the nature, quantity, quality, other properties and packaging following the agreement. Sweden takes a similar approach in its Consumer Sales Act (1990:932) 16 where it is written that The good is to, in terms of type, quantity, quality, other attributes and packaging, conform with what is stated in the contract. In another addition, the Norwegian legislation also states that the goods be free from a third party s rights in the goods, such as ownership or pawn rights. Latvia and Lithuania also make an explicit link between the quality of consumer goods and other regulations. In the Latvian Consumer Rights Protection Law, Art. 14.1/ CC: Art it is stated that the consumer goods should be in the conformity not only with the contract, but also with additional regulations. In the Lithuanian Law on Consumer Protection (Art. 14 (1)) it is stated that the quality and safety of consumer goods and services are regulated by the Civil Code, the Law on Products Safety, the Law on Food and other laws. A slight deviation from the Directive 1999/44/EC is where countries have used a negative rather than positive conformity measure. While the Directive has a presumption of conformity if the good conforms to the principles in Article 2 (i.e. goods shall be deemed in conformity if they fulfil these principles), some countries have simply reversed this formulation. Poland and Estonia consider good not to be in conformity if they fail to align with these principles. In Poland for example, the Polish Civil Code, Art. 556(1) 1 lists four scenarios where the goods sold are deemed not to be in conformity with the contact. These are: When the goods do not have the qualities that the consumer was informed of by the seller; When the goods cannot be used for the purpose communicated by the consumer to the seller; When the goods do not have the qualities that goods of such type should have; and When the goods are incomplete. In Slovenia the Minister of Economy defines a list of goods for which the conformity guarantee (i.e. a guarantee for flawless operation of purchased goods, for which both 26

27 the seller and producer are liable) is to be issued. The most recent list of goods was defined in the legislation as of 10 March Article 2 stipulates that conformity guarantee shall be issued for at least one year for the following types of goods: Products for household and similar use, Products in the automotive and similar industries, Machinery and equipment for agriculture, Information technology products, Sports equipment and props, Products in the area of radio communications, audio and video techniques and devices connected to them, Electro-medical devices intended for personal use, Devices for protection against fire, Wastewater treatment plants. Article 3 stipulates that conformity guarantee shall be issued for a minimum period of one month for the following types of goods: motorized road vehicles, trailers, vehicles with auxiliary motor. These articles appear to go against the concept of the legal guarantee, which specifies a guarantee of not less than two years. However, as the two-year duration is specified in Slovenian legislation, it appears that the above articles are redundant in that respect. A1.3.7 Hierarchy of remedies Most countries under the scope of the study have chosen to implement a hierarchy of remedies which follows the following formula: Repair or replacement of the good in the first instance; followed by Reduction of price or refund. Typically these remedies are accompanied by a stipulation that the remedy be accomplished within a reasonable time, although this is often not defined in legislation (see Section A1.3.2 above). In other cases, there may be no time limit for implementation of the remedy. However a number of countries stand out as exceptions. These are: Greece and Portugal, which have no hierarchy of remedies, and where consumers may request any of the four remedies as they wish. Latvia, which does not apply a hierarchy of remedies for the first six months, and thereafter repair or replacement. Norway, which only offers repair in the first instance, but thereafter reduction of price, replacement or refund. Sweden, where the consumer may request a refund if they consider the defect significant. 65 Available at: 27

28 The UK, which has recently implemented a short-term right to reject, but this applies to goods which may perish in that timeframe. Otherwise the more conventional approach applies. Table 6: Hierarchy of remedies Hierarchy? First choice of remedy Subsequent remedy 1. Austria Yes Repair or replacement Reduction of price or refund 2. Belgium Yes Repair or replacement Reduction of price or refund 3. Bulgaria Yes Repair or replacement Reduction of price, or refund if the guarantee is not applied within one month. 4. Croatia Yes Repair or replacement Reduction of price or refund 5. Cyprus Yes Repair or replacement Reduction of price or refund 6. Czech Republic Yes Repair or replacement Reduction of price, or refund if the guarantee is not applied within 30 days 7. Denmark Yes Repair or replacement Reduction of price or refund 8. Estonia Yes Repair or replacement Reduction of price or refund 9. Finland Yes Repair or replacement Reduction of price or refund 10. France Yes Repair or replacement Reduction of price or refund if first remedy not applied within one month 11. Germany Yes Repair or replacement Reduction of price or refund 12. Greece No Repair, replacement, reduction of price or repair 13. Hungary Yes Repair or replacement Reduction of price or refund 14. Iceland Yes Repair or replacement Reduction of price or refund 15. Ireland Yes Refund Repair or replacement 16. Italy Yes Repair or replacement Reduction of price or refund 17. Latvia Yes Repair, replacement, reduction of price or repair in the first six months After six months, repair or replacement 18. Lithuania Yes Repair or replacement Reduction of price or refund 19. Luxembourg Yes Repair or replacement Reduction of price or refund if first remedy not applied within one month 20. Malta Yes Repair or replacement Reduction of price or refund 21. Netherlands Yes Repair or replacement Reduction of price or refund 22. Norway Yes Repair or replacement Reduction of price or refund 23. Poland Yes Repair or replacement Reduction of price or refund 24. Portugal No Repair, replacement, reduction of price or repair, to be applied within 30 days 25. Romania Yes Repair or replacement. Remedy to be applied within 15 days, otherwise refund applies. Reduction of price or refund 26. Slovakia Yes Repair or replacement Reduction of price or refund 27. Slovenia No Repair, replacement, reduction of price or repair, to be applied within 8 days 28. Spain Yes Repair or replacement Reduction of price or refund 29. Sweden Yes Repair or replacement (refund if the consumer considers the defect significant) 30. UK Yes Full refund under a short-term right to reject (30 days), repair or replacement Reduction of price or refund Reduction of price or refund 28

29 A1.3.8 Seller liability In the context of the legal guarantee only 66, the vast majority of EU Member States have not given the consumer the right to pursue a claim along the distribution chain. A small number of countries, including non-eu members Norway and Iceland, have given the consumer the right to claim against others in the distribution chain. There are two approaches to this: A full right to pursue a claim against an intermediary; A partial right to pursue a claim against an intermediary, whether based on specific conditions or other existing laws. Countries in the first category include: Hungary (where the consumer is entitled to seek a repair or replacement); Latvia; and the Netherlands. Countries in the second category include: Finland, which allows the consumer to claim against an intermediary who supplied the good for resale. France, Romania and Spain, which give the consumer the right to pursue an intermediary under the hidden defect ( latent defect in Romania) concept. However, this typically involves the consumer assuming the burden of proof if they wish to rely on this right. Iceland, where if the seller can claim against another intermediary, the consumer is also given this right. In Slovenia, the Minister of Economy defines a list of goods for which the conformity guarantee (i.e. a guarantee for flawless operation of purchased goods, for which both the seller and producer are liable) is to be issued. Goods purchased under this guarantee offer the consumer the right to pursue intermediaries further up the distribution chain (this is not a right for Slovenian consumers under the legal guarantee). Sweden, where the consumer can pursue another intermediary if the seller is insolvent, has ceased trading or cannot be located. 66 However, this does not diminish the rights that consumer may have in relation to suing a firm for personal damages or if an intermediary or manufacturer has offered their own commercial guarantee. 29

30 Table 7: Sellers in the distribution chain whom the consumer has recourse to for a remedy Retailer Distributor/Importer Manufacturer 1. Austria Yes No No 2. Belgium Yes No No 3. Bulgaria Yes No No 4. Croatia Yes No No 5. Cyprus Yes No No 6. Czech Yes No No Republic 7. Denmark Yes No No 8. Estonia Yes No No 9. Finland Yes Yes Yes* 10. France Yes Yes (for hidden defects) Yes (for hidden defects) 11. Germany Yes No No 12. Greece Yes No No 13. Hungary Yes Yes Yes 14. Iceland Yes Yes Yes 15. Ireland Yes No No 16. Italy Yes No No 17. Latvia Yes Yes Yes 18. Lithuania Yes No No 19. Luxembourg Yes No No 20. Malta Yes No No 21. Netherlands Yes Yes Yes 22. Norway Yes Yes Yes 23. Poland Yes No No 24. Portugal Yes No Yes 25. Romania Yes Yes (for latent defects) Yes (for latent defects) 26. Slovakia Yes Unknown Unknown 27. Slovenia Yes Yes, but under the 1 year guarantee Yes, but under the 1 year guarantee 28. Spain Yes Yes, if the retailer cannot be located Yes, if the retailer cannot be located 29. Sweden Yes Yes, if the retailer is no longer trading or cannot be located Yes, if the retailer is no longer trading or cannot be located 30. UK Yes No No Note: * In certain occasions/depending on the interpretation of the legislation, as in Finland it is specified that The consumer has the right to also direct demands to a previous seller in the chain of contracts for a faulty good (1978/38 5 Ch. 31 ) A1.3.9 Additional rights 67 The following additional rights, beyond the extensions to the stipulations of Directive 1999/44/EC, have been recorded by the study. Price of the good According Danish Sale of Goods Act Nr /03/ , if the price of the good is not visible, the consumer is to pay a price which is reasonable given to the type of good, its condition and the circumstances. 67 We have excluded right of withdrawal and information requirements from this section as these are largely similar in each country due to being derived from other Directives and are not additional rights. We have also excluded references to consumer s ability to sue for injuries caused and references to immovable goods. These aspects touch on different branches of law, and so it is unclear whether they represent additional rights in the country, or just that these rights (linked to real estate or personal injury) are expressed in legislation related to guarantees and not elsewhere. We have also excluded class actions as these are broader in application than guarantee disputes. These rights are not exhaustive. 30

31 Right to compensation for late delivery A number of Nordic countries have given the consumer the right to cancel a contract and seek a refund, or seek compensation for damage (if applicable) if the seller has failed to deliver the good by a specific date and that this delivery date was significant to the buyer. This is the case in Denmark, Finland, Sweden and Norway. In Denmark, the seller may be able to excuse themselves from this stipulation if the delay was prompted by the buyer or an accidental event for which the buyer bears the risk. In the case of sale of generic goods the seller has a more limited possibility to avoid paying damages. In Finland, the buyer has the right to cancel the purchase if the good is delivered too late, as long as the buyer duly notifies the seller of this. A Swedish consumer has the right of withdrawal if a seller significantly delays the delivery of a product vis-à-vis the consumer s needs. The consumer may also withdraw if, prior to entering the contract, the seller has been informed that the delivery of the good must be on a certain day at the latest and that this time of delivery is decisive for the consumer to enter into the agreement. Right to consumer education Portuguese legislation (the Law for the Consumer Protection) introduces the concept of a right to general information (Art.7) wherein the State should promote an educational policy for consumers, by inserting in school, as well as in permanent education activities, programmes and activities related to consumption and consumer rights, using, in particular, IT tools. It is further stated that the State should develop actions and adopt measures to training and consumer education, in particular by: the implementation in the education system, particularly in primary and secondary education programmes and educational activities for consumption; supporting initiatives in this field which are promoted by consumer associations promoting education training and awareness actions for consumers in general; promoting national policy for training of trainers and experts in the area of consumption. The establishment of educational programs broadcast on public radio and television incorporate spaces for consumer education and training. Similarly, in Lithuania, it is also written in the legislation that consumers shall have the right to education in the sphere of consumer protection. Right to withhold payment In Norway, the consumer has the right to withhold payment to cover demands or obligations relating to the non-conformity, but the payment withheld cannot clearly exceed the amount needed to secure the aforesaid demands/obligations. If the seller will deliver goods in instalments and there is a breach in regards to one instalment, the buyer may as per 58 cancel the instalment in question. If it is furthermore likely that the same breach will occur for the following instalments, the buyer may cancel these as well if done within a reasonable time frame. Likewise, if the consumer is to pay these instalments in part as delivered and does not live up to his end of the bargain, the seller has the right to cancel a delivery which has not been paid. If this breach of contract is likely to continue for the rest of the instalments, the seller has the right to cancel the subsequent instalments as well, if notified within a reasonable time frame. 31

32 Conformity guarantee As stated above, in Slovenia, the Minister of Economy defines a list of goods for which the conformity guarantee (i.e. a guarantee for flawless operation of purchased goods, for which both the seller and producer are liable) is to be issued. Goods purchased under this guarantee offer the consumer the right to pursue intermediaries further up the distribution chain (this is not a right for Slovenian consumers under the legal guarantee). Hidden defect/latent defect As stated above, in France, Belgium and Romania, the concept of hidden/latent defect is in place. If a consumer wishes to claim under the hidden/latent defect, they have the right to pursue other intermediaries in the distribution chain. In France, the hidden defect allows the consumer to claim from two years from the discovery of the defect, rather than two years from the delivery of the good. However, the burden of proof is solely on the consumer in all three countries with this right. 32

33 RO BG PL EU13 HU DE PT FI AT LT EU28 ES LV IE EL EU15 IT CZ SK DK EE NL HR FR SI SE UK BE MT LU CY IS NO Annex 2 The legal guarantee for second hand goods A2.1 Buying second hand goods Across the EU28, roughly a quarter of respondents in the consumer survey had bought second hand consumer goods in the past two years: 10% had bought second hand refurbished goods and 13% second hand non-refurbished goods. Respondents in Bulgaria were the most likely to report having bought refurbished second hand goods (23%), while respondents in Poland and Romania were the most likely to have bought non-refurbished second hand goods (19% and 21%, respectively). Figure 1: Second hand goods bought in the past two years % Yes, I bought one or more second hand non-refurbished good(s) % Yes, I bought one or more second hand refurbished good(s) Q41a. In the last two years, have you bought any second hand consumer goods? You can select more than one answer. %, by country, Base: all respondents (EU28: n=26,659; NO: n=1,004; IS: n=505) Source: Consumer survey A2.2 Informing consumers about the legal guarantee for second hand goods and its length Respondents who had bought second hand goods were asked to think about the last such product bought and to report whether, according to seller, the product was covered by a legal guarantee. For non-refurbished second hand goods, 33% of respondents answered that the seller had informed them that the product was covered by a legal guarantee; a larger share of respondents (43%), however, had been incorrectly informed that the product was not covered by a legal guarantee. A quarter of respondents had not received information about the legal guarantee when last buying a second hand non-refurbished second hand good. The results were somewhat more positive for refurbished second hand goods: 41% of respondents had been correctly informed that the product was covered by a legal guarantee, compared to 35% who had been told the opposite and 24% who had not received any information. 33

34 RO CZ SK ES EE IT PT HU EU28 DK FR DE SI IE BE EL PL UK HR LU* MT* NL LV SE BG AT LT FI CY* NO IS* Figure 2: Information received from the seller: second hand good covered by a legal guarantee Non-refurbished second hand goods Refurbished second hand goods 25% 33% Yes No 24% 41% 43% No information was provided 35% Q41b. Thinking about the last time you bought a second hand good, was this product according to the seller covered by a legal guarantee? %, EU28, Base: Respondents who bought second hand goods (non-refurbished second hand goods: n=3,463; refurbished second hand goods: n=2,958) Source: Consumer survey Looking at the individual country results, it can be seen that the proportion of respondents who had bought second hand goods, and who had been informed about the legal guarantee for such goods, ranged from 13% in Cyprus to 63% in Romania. In Spain, Slovakia and the Czech Republic, between 48% and 55% of respondents had been informed that second hand goods are also covered by a legal guarantee. Figure 3: Information received from the seller: second hand good covered by a legal guarantee, by country % Yes % No % No information was provided Q41b. Thinking about the last time you bought a second hand good, was this product according to the seller covered by a legal guarantee? Note: * n<100 %, by country, Base: Respondents who bought refurbished or non-refurbished second hand goods (EU28: n=5,772; IS: n=98; NO: n=177) Source: Consumer survey 34

35 Respondents who had been informed that the second hand good that they had bought was covered by a legal guarantee were also asked what information was provided about the length of the guarantee period. For non-refurbished second hand goods, 34% of respondents were correctly informed about the one-year guarantee period; the corresponding figure for refurbished second hand goods was 41%. For both types of products, roughly a third of respondents were told that the guarantee period for second hand goods was less than one year (three months or six months). Figure 4: Information received about the length of the legal guarantee period Non-refurbished second hand goods Refurbished second hand goods 3 months 11% 3 months 10% 6 months 22% 6 months 24% 12 months 34% 12 months 41% 18 months 5% 18 months 4% 2 years 17% 2 years 13% 3 years 2% 3 years 1% 5 years 0% 5 years 1% 6 years 1% 6 years 0% Don t know 7% Don t know 6% Q41c. According to the seller, what was the length of the legal guarantee for this second hand product? %, EU28, Base: Respondents that were informed by the seller that the second hand good was covered by a legal guarantee (nonrefurbished second hand goods: n=1,022; refurbished second hand goods: n=1,122) Source: Consumer survey 35

36 Annex 3 Valuation of the legal and commercial guarantee market A few critical notes As discussed in this section, there is not one single approach that can be taken to value legal guarantees and commercial guarantees (the latter incorporating integral guarantees and paid-for guarantees) due to the fact that we are discussing three very different concepts. These concepts are a legal obligation by sellers to sell conforming goods (legal guarantee), a warranty by a seller that a good is of superior quality and will last a period of time which exceeds that of the legal guarantee (the commercial integral guarantee) and finally the classic extended warranty, which is in itself a standalone product (the commercial paid-for guarantee) which is effectively an add-on product that closely resembles insurance and very often is an insurance product. Therefore it is not appropriate to consider commercial guarantees as a single coherent market which can be valued through one methodology. A further complication to this task is that there is not really a market for integral guarantees as such. A market only exists for goods and products which are purchased directly. Integral guarantees are always a secondary consideration. Although a consumer may choose a product because it is guaranteed, they shop for the product first and the guarantee second. In this respect, a commercial guarantees market is a misnomer. Regarding paid-for guarantees, it was possible to estimate the value of this market, but we draw attention to the fact that a commercial firm (Finaccord) already professionally values the paid-for guarantees market and their research is available for a fee, although they do not cover every country in scope of this tender. Finally, from a consumer perspective, we believe the valuation of the various guarantees at macro level is not particularly relevant. Consumers are more likely to be impacted by the functioning and trustworthiness of guarantees on the products they buy (practical information) rather than the overall economic or financial value of the industry, which is an abstract concept to them. A3.1 Valuation of the paid-for commercial guarantee market The valuation of the paid-for commercial guarantee market uses data from two different streams. The first source is Eurostat data on household expenditure on consumer goods, as used for the previous exercise on the legal guarantee market valuation. The second source was data from a commercial company called Finaccord which produces specific reports on the extended warranty market. A3.1.1 Valuation of paid-for guarantees for brown, white and grey goods To estimate a value for paid-for guarantees for brown, white and grey goods, we have used a similar approach as for legal guarantees, relying on COICOP data from Eurostat 68, as well as data from Finaccord. The approach was as follows: COICOP data from Eurostat was aggregated at national level for the brown, white and grey goods categories. 68 Specifically Final consumption expenditure of households by consumption purpose - COICOP 3 digit - aggregates at current prices, Table reference:nama_co3_c. Data was taken for 2012, but for Bulgaria, Greece and Norway data is from For Romania data is from

37 One Finaccord report 69 for Austria was used to provide a benchmark ratio percentage value for total paid-for guarantees in relation to the underlying value of brown, white and grey goods sold to consumers. The total value of brown, white and grey goods sold was multiplied by the benchmark percentage value. The following must be noted when considering this analysis: Take-up (or attachment ) rates, being the percentage of consumers who will purchase a paid-for guarantee for a good, varies tremendously from country to country, which in turn means that the total value of paid-for guarantees sold will also vary. Finaccord produce separate reports for a number of different countries which detail estimated take-up rates and percentage ratios per product category. However, in our approach we are using a singled blended percentage ratio due to our limited access to Finaccord data. Finaccord treat mobile telephones and similar goods (i.e. tablets etc.) as a separate market. In our analysis there is no such data split. According to Finnacord, the percentage ratio of paid-for guarantees to total goods values was 2.96% for brown goods, 2.76% for white goods and 2.30% for grey goods. The average of all three values is 2.67%. This was the value which was applied to the COICOP values at national level. 69 Finaccord, (September 2014), Market Report, Extended Warranties and Insurance for Mobile and Non- Mobile Consumer Products in Austria. 37

38 Table 8: Estimated value of paid-for guarantees for brown, white and grey goods Purchased Brown, White and Grey goods, Value in millions Paid-for guarantees sold to consumers at 2.67% ratio, Value in millions Germany UK France Italy Spain Netherlands Poland Norway Belgium Austria Sweden Denmark Finland Czech Republic Portugal Romania Bulgaria Greece Slovakia Hungary Ireland Lithuania Slovenia Luxembourg Latvia Estonia Malta Cyprus Iceland Total ,860 Based on this approach we have estimated the value of the paid-for guarantee market as 4.8bn for the year This is likely a conservative estimate as Finaccord 70 have estimated the European market for paid-for guarantees to be worth 5.58bn in Although their data for that year included a number of large non-eu markets, in 2013 Finaccord has estimated the paid-for guarantee market for brown, white and grey 70 Finaccord (July 2011), Press Release: Extended Warranties and Insurance for Mobile and Non-Mobile Consumer Products in Europe, and Finaccord (March 2013), Press Release, Mobile products and emerging markets lead the way in the global market for extended warranties and insurance related to consumer electronics. Finaccord s data is derived from research covering 25 countries in Europe, namely: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Norway, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, the UK and Ukraine. 38

39 goods at 4.8bn for France, Germany and UK alone, i.e. equal to the value of our our estimate for all the EU28 plus Norway and Iceland for A3.1.2 Valuation of paid-for guarantees for cars According to a report prospectus by Finaccord on a study specifically on extended warranties for new and used cars in Europe 71 : across new and used cars combined, revenues for extended warranties were worth 1.19% of the value of car sales in the most developed market in 2013 in comparison to the European weighted average of 0.70%. According to Eurostat, the total expenditure of EU households on car purchases in the EU28 in 2012 was approximately 255 billion 72. Based on these two values, the valuation of the paid-for guarantees for cars across the EU28 is: A value of approximately 1.79bn at the lower range of 0.70% A value of approximately 3.04bn at the upper range of 1.19% By contrast, Finaccord have stated that the total market is worth approximately 2.61bn 73 for the countries in scope of their research. 71 Finaccord, (October 2013), Extended Warranties for New and Used Cars in Europe. It should be noted that Finaccords data is gathered from across a number of countries which are not covered by this study, and also that not all EU countries are covered. Finaccord s data is derived from research covering 25 countries in Europe, namely: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Norway, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, the UK and Ukraine. 72 Final consumption expenditure of households by consumption purpose - COICOP 3 digit - aggregates at current prices, Table reference:nama_co3_c. Data was taken for 2012, but for Bulgaria, Greece and Norway data is from For Romania data is from Finaccord, (October 2013), Extended Warranties for New and Used Cars in Europe. 39

40 Table 9: Estimated value of paid-for guarantees for cars Purchase of Vehicles in m Value at 0.70% Value at 1.19% Germany 68, UK 51, France 37, Italy 20, Spain 13, Netherlands 7, Norway 6, Sweden 6, Belgium 6, Austria 5, Denmark 5, Poland 5, Greece 3, Portugal 2, Finland 2, Czech Republic 2, Ireland 2, Romania 1, Hungary 1, Bulgaria Luxembourg Slovakia Slovenia Lithuania Cyprus Latvia Estonia Malta Iceland Total 255, , ,

41 A3.2 Valuation of the integral commercial guarantees market Many goods offer a manufacturers guarantee which exceeds the legal guarantee, particularly in high value branded goods. As such guarantees are defined at the product level, it was recognised that it may not actually be possible to generalise the costs and apply across specific product category levels as there will be a huge difference in price and product quality between products within the same category. For this reason, the consortium was not confident in being able to establish the size of the integral commercial guarantees market without detailed input from manufacturers. As this was not forthcoming, it was not possible to value this market. A3.3 Valuation of the legal guarantee market The valuation of the legal guarantee is more straightforward. As all goods are covered by the legal guarantee, the guarantee coverage is equal to the value of consumer goods purchased per annum. In this study we refine it based on theoretical defect rates and the consumer s claiming habits in an attempt to find the realised value of the legal guarantee. The approach to the valuation of the legal guarantee to European consumer is as follows: The value of physical consumer goods purchased in the EU in one year (i.e. size of market guaranteed by the legal guarantee) based on COICOP. The application of theoretical defect rates (proportion of goods for which the legal guarantee could be invoked). This is based on Acceptable Quality Levels and stakeholder feedback. The application of the percentage of consumers who had a legitimate cause for complaint and took action to solve the problem. A3.3.1 Value of total consumer goods To estimate a value for consumer goods, COICOP data was taken from Eurostat 74 and totalled per country for all tangible goods, including perishable items such as foods and beverages, as well as the purchase of vehicles. All services were excluded. A3.3.2 Acceptable Quality Levels Acceptable Quality Levels (AQL) 75 are widely relied on in transactions between retailers and manufacturers as a way of conducting random quality checks which in turn is used to have a representative estimate of overall product quality. Another way of understanding AQL is to consider it as the quality level that is the worst tolerable 76. In 74 Specifically Final consumption expenditure of households by consumption purpose - COICOP 3 digit - aggregates at current prices, Table reference:nama_co3_c. Data was taken for 2012 for most countries but from 2011 for Bulgaria and Greece, from 2010 for Romania and from 2009 for Lithuania. Data was for physical products only and excludes any services, but does include perishable goods such as food and beverages. 75 See definition given by ISO : and general discussion on the following blog: 76 International Organisation for Standardisation, November 1999, ISO :1999, Sampling procedures for inspection by attributes. 41

42 practice, three types of defects are distinguished. For most consumer goods 77, the limits are: 0% for critical defects (totally unacceptable: a user might get harmed, or regulations are not respected). 2.5% for major defects (these products would usually not be considered acceptable by the end user). 4.0% for minor defects (there is some departure from specifications, but most users would not mind it). AQL should not be considered as a specific defect rate for goods, but only as a test, which is applied to try and ensure overall consistent quality levels in orders of goods 78. In the valuation of the legal guarantee market, the AQL is used as a proxy for defect levels. AQL should not be considered as the actual quality standard of the goods sold within European retail industry, which in many cases is higher. According to one source, many large retailers have a zero defect policy, which means that there is no tolerance of faulty goods within the supply chain. If a supplier is unable to maintain this commitment, it runs the risk of incurring a financial penalty or being de-listed 79. In addition to this, consultation with stakeholders in this study revealed that, in the case of one seller, the actual defect rate of their goods was less than 1% across all categories. For the purposes of this study we are applying rates of 1%, 2.5% and 4% defect rates, accounting for low, medium and high scenarios, where low is based on stakeholder feedback and medium and high are based on AQL rates. A3.3.3 Percentage of consumers who had legitimate cause for complaint and took action to resolve the issue In order to give some further refinement to the total estimated value of defective goods, we are also applying the percentage of consumers who, in their respective countries, chose to complain. For this value we are relying on the Flash Barometer which contained the question: In the past 12 months, have you had legitimate cause for complaint when buying or using any goods or services in (our country), for which one answer was: Yes, and you took action to solve the problem(s). We have applied the percentage positive responses to this answer as a proxy for the realised value of the legal guarantee (the other response to this question was Yes, but you did not do anything ). Taking this approach we isolate the consumers who had legitimate cause to complain, but did not do so (and therefore, did not realise their legal guarantee value. 77 These rates and the ISO 2859 standard are commonly referred to by industry practitioners. For example, see the following websites of industry practitioners who refer to the ISO standard: and It is nonetheless worth to mention that recent empirical research from the US market on durable goods points towards similar expected defect rates: Gurel and Cakmakci estimated defect rates on the mobile market found an average of 1-5% monthly for the period See Gurel, U., & Cakmakci, M. (2013). Impact of reliability on warranty: A study of application in a large size company of electronics industry. Measurement, 46(3), Varley, Rosery (2014), Retail Product Management: Buying and merchandising. 80 European Commission (June 2013), Flash Eurobarometer 358, Consumer Attitudes towards cross border trade and consumer protection 42

43 One clear weakness of this approach is that we cannot tell what proportion of consumers actually had legitimate cause, or whether their claims were actually upheld subsequently. For the purposes of this study, we assume that all claims were legitimate, and that all those who did take action received the appropriate remedy. According to the calculation, the total value of the legal guarantee is 7.5tn, while the realised value ranges from 62bn to 155bn to 249bn depending on the defect scenario in use. 43

44 Table 10: Estimated value of 'realised value' for legal guarantees in m Total purchased goods Theoretical Defect Rate 1% Theoretical Defect Rate 2,5% Theoretical Defect Rate 4% Had issue and complained to retailer Realised value at 1% defect rate Realised value at 2.5% defect rate Realised value at 4% defect rate Germany % UK % France % Italy % Spain % Netherlands % Poland % Sweden % Belgium % Austria % Greece % Norway % Denmark % Portugal % Finland % Czech Republic % Ireland % Romania % Hungary % Slovakia % Bulgaria % Slovenia % Lithuania % Luxembourg % Latvia % Cyprus % Estonia % Iceland % Malta % Total

45 Annex 4 Behavioural experiment regression analysis This annex presents the detailed regression analysis from the choice experiment. 45

46 Table 11: Impact of information treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Informed Not informed Treatment effect Informed Not informed Treatment effect CZ Proportion of respondents choosing correct option (%) 41% 45% -4% 49% 44% 5% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 52% 60% -8%*** 53% 48% 4% (%) FR Proportion of respondents choosing correct option (%) 44% 47% -3% 50% 46% 4.5% Average time taken to complete experiment (secs) * Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 54.5% 59% -4% 53% 50% 3% (%) DE Proportion of respondents choosing correct option (%) 46.8% 47.3% -0.6% 48.73% 48.8% -0.04% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 57.5% 56.5% 1% 51% 53% -2% (%) IT Proportion of respondents choosing correct option (%) 47% 41% 6%* 45.5% 47% -1% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 60.1% 59.9% 0.2% 51% 55% -4% (%) PL Proportion of respondents choosing correct option (%) 43% 42.5% 0.5% 50% 47% 3% Average time taken to complete experiment (secs) * Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 56% 58% -3% 57% 54% 3% (%) RO Proportion of respondents choosing correct option (%) 41% 36% 5%* 36% 37% -1% Average time taken to complete experiment (secs)

47 Table 11: Impact of information treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Informed Not informed Treatment effect Informed Not informed Treatment effect Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 54% 53% 1% 49% 47% 1% (%) SE Proportion of respondents choosing correct option (%) 46.8% 47.6% 0.7% 61% 63% -1% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 55% 57% -2% 64.2% 64.3% -0.2% (%) UK Proportion of respondents choosing correct option (%) 45% 49% -4% 53% 50% 3% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 56% 59.6% -3.6% 56% 54% 3% (%) Overall Proportion of respondents choosing correct option (%) 44.35% 44.39% -0.04% 49% 48% 1% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option (%) 56% 58% -2%** 54% 53% 1% Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. For incidence of respondents making correct, or improved, choices, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. For Average time taken to complete the experiment, or complete it making correct, or improved, choices, the dependent variable is continuous, hence these regressions are OLS regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 47

48 Table 12: Impact of guarantee presentation treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Graphical Text Treatment effect (%) Graphical Text Treatment effect CZ Proportion of respondents choosing correct option (%) 42% 44% -2% 43% 49% -6%** Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 54% 57% -3% 47.5% 53.5% -6%* option (%) FR Proportion of respondents choosing correct option (%) 46% 47% -1% 47% 49% -3% Average time taken to complete experiment (secs) * Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 56.6% 56.6% -0.03% 49% 53% -4% option (%) DE Proportion of respondents choosing correct option (%) 47% 48% -1% 48.6% 48.9% -0.3% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 56% 58% -2% 51.6% 51.9% -0.3% option (%) IT Proportion of respondents choosing correct option (%) 43.8% 44.2% -0.4% 44% 48% -4% Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make ** correct or improved option (secs) Proportion of respondents choosing correct or improved 59.8% 60.3% -0.5% 51% 55% -4% option (%) PL Proportion of respondents choosing correct option (%) 43% 44% 1% 51% 46% 6%* Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make * ** correct or improved option (secs) Proportion of respondents choosing correct or improved 59% 55% 4% 58% 53% 4% option (%) RO Proportion of respondents choosing correct option (%) 37% 40% -3% 36.7% 36.9% -0.2% Average time taken to complete experiment (secs) * 48

49 Table 12: Impact of guarantee presentation treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Graphical Text Treatment effect (%) Graphical Text Treatment effect Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 52% 56% -4% 46.5% 49% -3% option (%) SE Proportion of respondents choosing correct option (%) 47% 48% -1% 66% 58% 8%*** Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 56.1% 55.6% 0.5% 68% 61% 7%** option (%) UK Proportion of respondents choosing correct option (%) 45% 49% -4% 52% 51% 1% Average time taken to complete experiment (secs) * Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved 54% 61% -7%** 54.7% 55.2% -0.6% option (%) Overall Proportion of respondents choosing correct option (%) 44% 45% -1% 48.6% 48.4% 0.2% Average time taken to complete experiment (secs) * Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option (%) 56% 57% -1% 53% 54% -1% Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. For incidence of respondents making correct, or improved, choices, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. For Average time taken to complete the experiment, or complete it making correct, or improved, choices, the dependent variable is continuous, hence these regressions are OLS regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 49

50 Table 13: Impact of guarantee complexity treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Simple (2-features) Complex (4-features) Treatment effect Simple (2-features) Complex (4-features) Treatment effect CZ Proportion of respondents choosing correct option (%) 42.9% 42.7% 0.2% 46.4% 45.9% 0.5% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 58% 53% 5%* 50.62% 50.6% 0.02% (%) FR Proportion of respondents choosing correct option (%) 47% 44% 3% 47% 49% -2% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 60% 54% 6%** 51.1% 51.4% -0.2% (%) DE Proportion of respondents choosing correct option (%) 46% 48% -2% 52% 46% 6%* Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 58% 56% 3% 56% 48% 7%** (%) IT Proportion of respondents choosing correct option (%) 42% 46% -4% 47% 45% 2% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 63% 57% 6%* 55% 52% 3% (%) PL Proportion of respondents choosing correct option (%) 42% 43% -1% 49% 48% 1% Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make correct or ** improved option (secs) Proportion of respondents choosing correct or improved option 57.3% 56.5% 0.8% 57.5% 53.5% 4% (%) RO Proportion of respondents choosing correct option (%) 40% 37% 3% 32% 41% -9%*** Average time taken to complete experiment (secs) **

51 Table 13: Impact of guarantee complexity treatment on choice experiment performance Country Coefficient Washing machines Mobile phones Simple (2-features) Complex (4-features) Treatment effect Simple (2-features) Complex (4-features) Treatment effect Average time taken to complete experiment and make correct or ** improved option (secs) Proportion of respondents choosing correct or improved option 56% 51% 5% 44% 52% -7%** (%) SE Proportion of respondents choosing correct option (%) 46% 48% -2% 62.5% 61% 1% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 57% 55% 2% 65% 63% 2% (%) UK Proportion of respondents choosing correct option (%) 48% 46% 3% 51% 52% -1% Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option 63% 52% 10%*** 54.9% 55% -0.1% (%) Overall Proportion of respondents choosing correct option (%) 44.4% 44.4% % 48.4% 48.6% -0.2% Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make correct or * improved option (secs) Proportion of respondents choosing correct or improved option (%) 59% 54% 5%*** 54% 53% 1% Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. For incidence of respondents making correct, or improved, choices, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. For Average time taken to complete the experiment, or complete it making correct, or improved, choices, the dependent variable is continuous, hence these regressions are OLS regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 51

52 Table 14: Impact of guarantee set on choice experiment performance Country Coefficient Washing machines Mobile phones Optimal to choose a Optimal to not choose a Treatment effect (%) Optimal to choose a Optimal to not choose a Treatment effect (%) commercial guarantee commercial guarantee commercial guarantee commercial guarantee CZ Proportion of respondents choosing correct option (%) 47% 39% 9%*** 43% 50% -7%** Average time taken to complete experiment (secs) ** Average time taken to complete experiment and make * correct or improved option (secs) Proportion of respondents choosing correct or improved 51% 60% -9%*** 43% 59% -15%*** option (%) FR Proportion of respondents choosing correct option (%) 45% 46% -1% 46% 50% -4% Average time taken to complete experiment (secs) Average time taken to complete experiment and make ** *** correct or improved option (secs) Proportion of respondents choosing correct or improved 49% 64% -15%*** 47% 56% -9%*** option (%) DE Proportion of respondents choosing correct option (%) 53% 41% 11%*** 51% 46% 5%* Average time taken to complete experiment (secs) * Average time taken to complete experiment and make *** correct or improved option (secs) Proportion of respondents choosing correct or improved 56% 58% -2% 51.8% 51.7% 0.1% option (%) IT Proportion of respondents choosing correct option (%) 63% 23% 36%*** 57% 36% 21%*** Average time taken to complete experiment (secs) Average time taken to complete experiment and make ** correct or improved option (secs) Proportion of respondents choosing correct or improved 68% 52% 16%*** 60% 47% 13%*** option (%) PL Proportion of respondents choosing correct option (%) 60% 27% 31%*** 57% 40% 17%*** Average time taken to complete experiment (secs) Average time taken to complete experiment and make correct or improved option (secs) Proportion of respondents choosing correct or improved option (%) 63% 51% 12%*** 58% 53% 6%* 52

53 Table 14: Impact of guarantee set on choice experiment performance Country Coefficient Washing machines Mobile phones Optimal to choose a Optimal to not choose a Treatment effect (%) Optimal to choose a Optimal to not choose a Treatment effect (%) commercial guarantee commercial guarantee commercial guarantee commercial guarantee RO Proportion of respondents choosing correct option (%) 52% 24% 27%*** 37% 36.7% 0.3% Average time taken to complete experiment (secs) Average time taken to complete experiment and make *** correct or improved option (secs) Proportion of respondents choosing correct or improved 58% 49% 9%*** 43% 53% -9%*** option (%) SE Proportion of respondents choosing correct option (%) 52% 42% 10%*** 50% 73% -22%*** Average time taken to complete experiment (secs) * Average time taken to complete experiment and make ** correct or improved option (secs) Proportion of respondents choosing correct or improved 54% 58% -4% 51% 77% -25%*** option (%) UK Proportion of respondents choosing correct option (%) 60% 34% 25%*** 59% 45% 13%*** Average time taken to complete experiment (secs) Average time taken to complete experiment and make ** correct or improved option (secs) Proportion of respondents choosing correct or improved 62% 53% 9%*** 59% 51% 8%*** option (%) Overall Proportion of respondents choosing correct option (%) 54% 35% 19%** 50% 47% 3%*** Average time taken to complete experiment (secs) Average time taken to complete experiment and make *** *** correct or improved option (secs) Proportion of respondents choosing correct or improved option (%) 58% 56% 2%* 52% 56% -4%*** Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. For incidence of respondents making correct, or improved, choices, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. For Average time taken to complete the experiment, or complete it making correct, or improved, choices, the dependent variable is continuous, hence these regressions are OLS regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 53

54 Table 15: Impact of primary product price treatment on willingness to pay measures Country Coefficient Washing Machines Mobile Phones High Low Treatment High Low Treatment effect effect CZ Annualised average willingness to pay ( ) *** *** Proportion of respondents accepting both offers (%) 13% 9% 5%** 6% 1% 5%*** Proportion of respondents rejecting both offers (%) 74% 81% -6.5%*** 71% 85% -14%*** FR Annualised average willingness to pay ( ) 8 5 3** 8 4 4*** Proportion of respondents accepting both offers (%) 12% 9% 3% 6% 2% 5%*** Proportion of respondents rejecting both offers (%) 77% 81% -4% 69% 82% -14%*** DE Annualised average willingness to pay ( ) *** Proportion of respondents accepting both offers (%) 12% 10% 2% 6.5% 3% 4%*** Proportion of respondents rejecting both offers (%) 75% 79% -4% 72% 83% -11%*** IT Annualised average willingness to pay ( ) ** *** Proportion of respondents accepting both offers (%) 23% 15% 9%*** 11% 4% 7%*** Proportion of respondents rejecting both offers (%) 61% 70% -9%*** 59% 82% -22%*** PL Annualised average willingness to pay ( ) *** Proportion of respondents accepting both offers (%) 21% 18% 3% 10% 4% 6%*** Proportion of respondents rejecting both offers (%) 61% 66% -5%* 66% 79% -13%*** RO Annualised average willingness to pay ( ) *** Proportion of respondents accepting both offers (%) 20% 21% -1% 13% 10% 3% Proportion of respondents rejecting both offers (%) 56.2% 55.8% 0.4% 58% 66% -8%*** SE Annualised average willingness to pay ( ) Proportion of respondents accepting both offers (%) 16% 10% 5%** 7% 4% 3%** Proportion of respondents rejecting both offers (%) 75% 77% -2% 71% 80% -9%*** UK Annualised average willingness to pay ( ) ** *** Proportion of respondents accepting both offers (%) 20% 13% 7%*** 10% 3% 7%*** Proportion of respondents rejecting both offers (%) 66% 74% -7.5%*** 69% 82% -13%*** Overall Annualised average willingness to pay ( ) *** *** Proportion of respondents accepting both offers (%) 17% 13% 4%*** 9% 4% 5%*** Proportion of respondents rejecting both offers (%) 68% 73% -5%*** 67% 80% -13%*** Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. Values may not add u due to rounding. For individual experiments, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 54

55 Table 16: Impact of commercial guarantee duration treatment on willingness to pay measures Country Coefficient Washing Machines Mobile Phones Long duration Short Treatment Long duration Short Treatment effect duration effect duration CZ Annualised average willingness to pay ( ) Proportion of respondents accepting both offers (%) 12% 10% 2% 3% 4% -1% Proportion of respondents rejecting both offers (%) 74% 79% -5%** 72.5% 83% -10%*** FR Annualised average willingness to pay ( ) 4 9-5*** Proportion of respondents accepting both offers (%) 7% 14% -7%*** 3.4% 4.5% -1% Proportion of respondents rejecting both offers (%) 84% 74% 10%*** 75% 76% -1% DE Annualised average willingness to pay ( ) Proportion of respondents accepting both offers (%) 9% 13% -4%** 4% 5% -1% Proportion of respondents rejecting both offers (%) 78% 76% 2% 77.8% 77.4% 0.4% IT Annualised average willingness to pay ( ) *** Proportion of respondents accepting both offers (%) 14% 25% -11%*** 7% 8% -1% Proportion of respondents rejecting both offers (%) 70% 61% 9%*** 69% 72% -3% PL Annualised average willingness to pay ( ) ** 7 9-3* Proportion of respondents accepting both offers (%) 18% 20% -2% 7% 6% 1% Proportion of respondents rejecting both offers (%) 66% 61% 4% 74% 72% 2% RO Annualised average willingness to pay ( ) *** %* Proportion of respondents accepting both offers (%) 21% 19% 2% 12% 11% 1% Proportion of respondents rejecting both offers (%) 59% 53% 5%* 62.3% 62.1% 0.2% SE Annualised average willingness to pay ( ) 5 9-4*** Proportion of respondents accepting both offers (%) 9% 18% -9%*** 4% 8% -4%*** Proportion of respondents rejecting both offers (%) 81% 70% 11%*** 76% 74% 2% UK Annualised average willingness to pay ( ) * Proportion of respondents accepting both offers (%) 12% 21% -9%*** 6% 7% -1% Proportion of respondents rejecting both offers (%) 72% 68% 4% 75% 76% -1% Overall Annualised average willingness to pay ( ) *** Proportion of respondents accepting both offers (%) 13% 18% -5%*** 6% 7% -1%* Proportion of respondents rejecting both offers (%) 73% 68% 5%*** 73% 74% -1% Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. For individual experiments, the dependent variable is binary, representing whether the respondent indicates that they expect their primary product to appreciate, or not; hence these regressions are logistic regressions. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 55

56 Table 17: Regression results: WTP measures against reasons for purchasing commercial guarantees: responses to Q14a Washing machines Mobile phones Average annualised willingness to pay ( ) Proportion of respondents accepting both offers (%) Proportion of respondents rejecting both offers (%) Average annualised willingness to pay ( ) Proportion of respondents accepting both offers (%) Proportion of respondents rejecting both offers (%) The product was likely to break down The cost of repairing the product would have been too high In the past, you have had a problem with a similar product * To have a longer guarantee coverage period ** You always buy the commercial guarantee when it is offered to you *** * A commercial guarantee had a fair price The product is very important to you, so a commercial guarantee is essential * You received a discount if you bought the product with a commercial guarantee You followed the advice of a salesperson * The commercial guarantee was included in the price of the product Other * ** Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. Values may not add up due to rounding. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. OLS regressions. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 56

57 Table 18: Regression results: WTP measures against reasons for not purchasing commercial guarantees: responses to Q14b Washing machines Mobile phones Average annualised willingness to pay ( ) Proportion of respondents accepting both offers (%) Proportion of respondents rejecting both offers (%) Average annualised willingness to pay ( ) Proportion of respondents accepting both offers (%) Proportion of respondents rejecting both offers (%) Commercial guarantees are not worth the money * ** The product is unlikely to break down * The problems usually arise after the expiration of the commercial guarantee Commercial guarantees typically come with exclusions and exceptions * * You don t feel like being pressured by the salesperson to buy something * * * The coverage period of the commercial guarantee is too short * The terms and conditions for commercial guarantees are not clear to me It is easier to buy a new product rather than spending money for a commercial guarantees You did not know that you could buy a commercial guarantee 7.922*** 0.101** *** 9.468** *** You were not offered to buy a commercial guarantee 4.242* ** ** 4.401** ** Other Note: Responses with very high responses to willingness to pay (e.g. more than the value of the primary product) have been dropped. Values are coefficients from regressions. Values may not add u due to rounding. */ **/ *** implies that the coefficient is statistically significant at 90%/ 95%/ 99%. OLS regressions. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. Source: Behavioural experiment 57

58 Annex 5 References Accent; RAND Europe (2010). Review of stated preference and willingness to pay methods. Competition Commission. AEA (2009). Work on Preparatory Studies for Eco-Design, Requirements of EuPs (II), Lot 17 Vacuum Cleaners, TREN/D3/ , Final Report. Akdeniz, B., Calantone, R.J. and Voorhees, C.M. (2013). Effectiveness of Marketing Cues on Consumer Perceptions of Quality: The Moderating Roles of Brand Reputation and Third- Party Information by: Arnum, E. (2013). Tenth Annual Warranty Report, Totals & Averages, Warranty Week Azzopardi, A. (2013). The contribution of EU directives to the objective of consumer protection: The European Law Students Association : e2/6b-2012.pdf Balachander, S. (2001). Warranty signalling and reputation. Management Science, 47(9), Bateman, I., Carson, R., Day, B., Hanemann, M., Hanley, N., Hett, T., et al. (2002). Economic valuation with stated preference techniques: A manual. Cheltenham: Edward Elgar. Bertini, Ofek and Ariely (2007). The effects of add-on features on perceived product value. Centre for Marketing Working Paper No : Bheda, R. (February 2004). What is Acceptable Quality Level? Stitch World. Borsch, A. (2014). Special topic: Consumers and the recession: Trends in Eurozone consumer spending. Global Economic Outlook: 3 rd Quarter Deloitte University Press. Boulding and Kirmani (1993). Experimental examination of signaling theory: Do consumers perceive warranties as signals of quality? Journal of Consumer Research Vol. 20(1): : Carrick, K. (2009). More consumers choosing warranties to fend off repair costs: CBS Money Watch (2011). Hold off extended warranties until you read this: Central Statistics Office Ireland, National Household Budget Survey, , Volume 2. Choi and Ishii (2009). Consumer perception of warranty as signal of quality: An empirical study of powertrain warranties: Organization/ishii pdf Cohen, Agrawal and Agrawal (2006). Winning in the aftermarket. Harvard Business Review. 58

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60 Ferguson, M., Guide Jr., V. D. R., and Souza, G. C. (2006). Supply chain coordination for false failure returns. Manufacturing & Service Operations Management, 8(4), Festinger (1957). A Theory of cognitive dissonance. Stanford University Press, p.3 Forbes (February 29, 2012). The surprising ways car dealers make the most money off you: Gerstberger, C. and Yaneva, D. (2013). Statistics in focus. Analysis of EU27 household final consumption expenditure Baltic countries and Greece still suffering most from the economic and financial crisis. Eurostat 2/2013. Gurel, U., and Cakmakci, M. (2013). Impact of reliability on warranty: A study of application in a large size company of electronics industry. Measurement, 46(3), Haan (2011). Bounded Rationality. Hartman, J. C., and Laksana, K. (2009). Designing and pricing menus of extended warranty contracts. Naval Research Logistics (NRL), 56(3), Henderson, J. E., and Dunn, M. A. (2007). Investigating the potential of fee-based recreation on private lands in the Lower Mississippi River Delta. Southern Agricultural Economics Association Meetings. Howells (2005). The potential and limits of consumer empowerment by information. Journal of Law and Society, , p Howells et al. (2010). Handbook of Research on International Consumer Law. Huang, H. Z., Liu, Z. J., and Murthy, D. N. P. (2007). Optimal reliability, warranty and price for new products. Transactions, 39(8), International Consumer Protection and Enforcement Network, Poland (2013). Why fight like Cats and Dogs, Alternative Dispute Resolution, 6 May 2013, International Organisation for Standardisation (November 1999), ISO :1999, Sampling procedures for inspection by attributes Ishida, C., Kaufman, P., Langrehr, F. and Pope, N. (undated) Extended Warranties and Insurance: Consumer Awareness and Perception. The Katie School of Insurance and Financial Services. Illinois State University Jack, N., Iskandar, B. P., and Murthy, D. P. (2009). A repair replace strategy based on usage rate for items sold with a two-dimensional warranty. Reliability Engineering & System Safety, 94(2), Jalava, J., and Kavonius, I. K. (2008). The effect of durable goods and ICT on euro area productivity growth? Kahneman, D., Knetsch, J., and Thaler, R. (2009). Experimental Tests of the Endowment Effect and the Coase Theorem. In E. Khalil (Ed.), The New Behavioral Economics. Volume 3. Tastes for Endowment, Identity and the Emotions. Elgar Reference Collection. International Library of Critical Writings in Economics, vol (pp ). Cheltenham, U.K. and Northampton, Mass. 60

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63 Annex 6 Methodology A6.1 Literature review and stakeholder consultation Main task 1 covered the following aspects of the market on legal and commercial guarantees: Analysis of the latest developments in the functioning of legal and commercial guarantees for consumers in the European Union; Description, analysis, and assessment of the performance of legal guarantees and commercial guarantees to explore the awareness and compliance of sellers and producers; and Evaluation of the prevalence of problems consumers encounter when executing their rights. This work was based on data collected as part of the five tasks foreseen in this specific contract. In addition to data gathering via a literature review and desk research, Main task 1 also incorporated the stakeholder consultation. A6.1.1 Choice of consumer goods In order to get a representative experience of how consumers fare within the markets of a representative range of important consumer products, the study was to cover 10 product categories within the following markets: Electronic products; ICT products; Small electrical household appliances; Large electrical household appliances; Clothing and footwear; and New cars. Below we display our agreed choice of products and the selection criteria for each. We have based our selection on both factors of prevalence and household reliance, and where possible attempted to focus on the impact to the household budget and in particular, lower socio-economic households in order to justify the selection. Table 19: Choice of products and overview of selection criteria Category 1. Electronic products Product(s) and Rationale Television Unsurprisingly, televisions are almost omnipresent in most European households at 98% ownership 81. Television (and radio) represents the cheapest form of entertainment and communication, due to the large volume of content which is broadcast for free on a national and international (via satellite) basis. The television is also a conduit for other forms of entertainment, including video players, the internet and games consoles. It therefore typically represents an entertainment hub for many households, and one which is expected to perform satisfactorily for many years. Second-hand television A second-hand television is added in order to explore the experience of consumers regarding guarantees in the second-hand market. 81 European Commission (2012). E-communications household survey. 63

64 Table 19: Choice of products and overview of selection criteria Category Product(s) and Rationale 2. ICT products Mobile phones Mobile phone ownership now outstrips landline usage on a household basis, reaching 89% of households across the EU (based on the 2012 Eurobarometer report 82 ). Mobile phones have become an indispensable tool not just for instant communication, but also as providers of information via the capabilities of smart phones. Due to the reliance that we place on mobile phones, and given the investment made into the more sophisticated devices, they are of clear importance to EU consumers. Laptops/Notepads The proportion of households in the EU with computer access was recorded at 68% in 2011 (based on the respondents own perception of what is a computer). Ownership is highest in the Netherlands (93%), Sweden (91%) and Denmark (89%). Conversely, computer ownership is rarest in Bulgaria (46%) and Greece (47%) 83. Computers are an intricate part of daily life in our society, and the ability to use a computer is generally considered a necessary skill. 3. Small electrical household appliances 4. Large electrical household appliances Cameras Despite facing competition from smartphones, the digital camera market remains very popular with consumers, with 84% household penetration recorded in the US 84. By contrast, the digital camera market in Europe is forecasted to grow at a CAGR of 7% over the period Vacuum cleaner Vacuum cleaners can vary in price, ranging from as low as 34 for a generic, ownbrand version to 499 in price for luxury models 86, making them largely affordable to most households. It is estimated 87 that 45 million vacuum cleaners are purchased every year in the combined EU market. The same source states that the number of vacuum cleaners bought annually is increasing due to a combination of declining product lifetime and the increasing trend towards multiple ownership whereby households have two or more units. This suggests that vacuum cleaner ownership is likely to have a very high household penetration rate (for example, since 1999, household ownership has been at over 94% in Ireland 88 ). The reason for the high reliance on vacuum cleaners is clear they are required to maintain good levels of domestic hygiene, in particular in relation to flooring surfaces which cannot be mopped (laminate floorings) or swept (carpets, rugs). Due to the importance of a functioning vacuum to household health and wellbeing, we have included it in the study. Refrigeration appliances For the category of large household appliances we have chosen fridges, freezers and combination fridge freezers as these appliances are central to the preservation of foodstuffs in the household, and therefore households place great reliance on the dependability and functioning of these appliances. Fridge freezers are also highly important to household budgeting as they allow households to both buy in bulk as well as buy a variety of the foods, and to preserve these foods for a period of time, as opposed to simply buying on a day- 82 Ibid. 83 Ibid. 84 Consumer Electronics Association (2012). The Changing Landscape of Digital Photography. 85 Research and Markets, Digital Camera Market in Europe (2014). 86 Prices taken from Argos.ie on 5 th May AEA (2009). Work on Preparatory Studies for Eco-Design, Requirements of EuPs (II), Lot 17 Vacuum Cleaners, TREN/D3/ , Final Report, (February 2009). 88 Central Statistics Office, National Household Budget Survey, , volume 2. 64

65 Table 19: Choice of products and overview of selection criteria Category 5. Clothing and footwear Product(s) and Rationale to-day basis. Additionally, for this category, the vast majority of households have only one of these devices on a unique basis (i.e. a fridge and freezer, or a fridge freezer) 89. Therefore, product reliability is a major factor. Laundry appliances Laundry appliances been chosen as a second product category under large electrical household appliances as it is a major requirement for both personal and household hygiene. Similar to fridges and freezers, households tend to rely almost exclusively on a single white good of this type. In addition to this, a washing machine (along with a TV, car and telephone) is considered by Eurostat as being one of the major consumer goods in indicators of poverty 90. Clothing and footwear Clothing and footwear represent a large outlay for households. Hence durability would be expected, particularly for lower-income households. Similarly shoes can represent a significant outlay, particularly for lower-income households and households with many children. According to statistics from the Polish Permanent Court of Arbitration, of the 6600 applications filed with the court in 2012, 1500 concerned footwear sales 91. Additionally, some countries in the EU provide clothing and footwear allowances for children of school age 92. Clothing and footwear do not have paid-for guarantees sold with them, however, they can be problematic in terms of determining appropriate measures when guarantees are breached (i.e. what is normal wear and tear and what is poor manufacturing?). 6. New cars New car The car industry is one of the major industries to be associated with sales of paidfor guarantees. Car purchases also involve high capital pay out, ongoing dependency and a potential captive market for replacement parts, which can all be factors in the sale of paid-for guarantees. This makes the sector highly relevant to the study. However, we will focus on family cars in the non-luxury segment in order to concentrate on vehicles on which households (particularly those with children) depend the most for day-to-day transport. A6.1.2 Literature review The literature review was conducted across multiple countries of the EU, Norway and Iceland. Within Task 1 and Task 3, the study primarily sought literature which dealt specifically with the matter of guarantees, including consumer rights in the area of guarantees and redress mechanisms. The study also reviewed academic literature in the area of consumer behaviour in relation to guarantees. The methodology for this literature review was to employ key word searches within search engines and academic databases in order to locate relevant documentation. The bibliography lists the sources relied upon for the ultimate literature review as well as 89 See for example, Consumer Focus, Under the influence? Consumer attitude to buying appliances and energy labels, 2012, where the study noted that almost no households had multiple refrigeration units. By contrast, households often had multiple electronic goods related to entertainment. 90 Eurostat (2012). Measuring Material Deprivation in the EU. 91 International Consumer Protection and Enforcement Network, Poland (2013). Why fight like Cats and Dogs, Alternative Dispute Resolution For example, see one such scheme in Ireland: ool_books_scheme.html 65

66 documents which underpin various other areas of the study (e.g. valuation approaches etc.). A6.1.3 Regulatory review The key pieces of legislation were: Consumer Sales Directive 93 Consumer Rights Directive 94 Directive on Unfair Commercial Practices 95 Directive on Unfair Contract Terms 96 The regulatory review involved gathering the salient rights from the above Directives and then moving down to the national regulatory framework to identify additional rights conferred on consumers, as well as the attendant redress mechanisms. For the identification and mapping of the legal instruments transposed into the national law, we followed the process detailed below: 1 Conduct a search on EUR-Lex for national implementing measures relating to the various Directives; 2 Utilise a team of researchers from across our network that are fluent in the official languages of the country in question to examine the implementing measures; 3 Note any countries which have not implemented any transposition (e.g. for example countries in the study which are not part of the EU); 4 Having identified the legal instruments for each country, follow through with stakeholder surveys (see below) to find out whether the legal instruments used to transpose the directive have loopholes, are awaiting judgements or interpretations from national courts, have been subject to rulings etc; 5 In addition to examining the legal position of the Directive, we will also examine the practical effects on the market for legal and commercial guarantees, noting impacts on retailers, manufacturers and consumers; 6 For each country we will deliver a report including the specific legal instruments and the state of play with specific reference to the effect on the consumer market, as well as any outstanding issues. 93 Op. cit., Directive 1999/44/EC. 94 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, OJ L 304/64, Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council ( Unfair Commercial Practices Directive ), OJ L 149, Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 095, 21/04/

67 Following this mapping of the legislation, we then examined the actual mechanisms of redress and enforcement and detailed the following: Redress mechanism and relevant actors/officers involved in the process; Methods of compensation (repair, replace, refund as applicable); Description of any guidelines or regulations used in terms of defining appropriate redress; How the burden of proof was evaluated; Description of any guidelines or regulations used in terms of assisting in claims adjudication; Calculations used (if any) regarding partial price refund or current price refund; Complaints data (if available and specific to guarantees). The findings from this approach were summarised in the country fiches, and the aggregate analysis was provided in the body of the final report. A6.1.4 Stakeholder consultation Our consultation activities relied on questionnaires being distributed directly to stakeholder groups across each of the countries included in our study. For the purposes of our consultation, we recognised eight separate stakeholder groups: Consumer Associations; European retail chains; Importers/distributors; Manufacturers; Enforcers; Insurance regulators; Dispute resolution organisations (Ombudsman, ADRs); Insurance undertakings; and National legal experts. Our approach to stakeholder consultations Surveys were tailored to the respondent category, although many common questions are posed across different categories. We also encouraged stakeholders to submit additional information, such as supporting data or documentation. The questionnaires used were developed in cooperation with the Commission during a number of working sessions. The design and content of the questionnaire was guided by the findings of the literature review. Deployment of the stakeholder consultation To deploy the electronic questionnaire we used SurveyMonkey 97 software in combination with an in-house Deloitte electronic mailing system. Each respondent address received a unique from Deloitte containing: A brief introduction to the study; URL link to the questionnaire; and An attached covering letter drafted by the European Commission giving greater information on the study and its objectives

68 A6.2 Price collection Guarantee prices have been recorded for four different consumer good categories: brown goods, grey goods, white goods and cars, which are further sub-divided by the specific categories shown below (in line with the choice of specific consumer goods for the overall study): Table 20: Products grouped under Brown, White and Grey Goods and Cars Brown White Grey Cars New Televisions Second hand televisions Cameras Dishwashers Vacuum cleaners Washing machines Fridges Laptops/Notepads Mobile Phones Cars A6.2.1 Methodology for the online price data gathering The approach to gathering data was based on the following step-by-step process: Online data gathering only (for offline data gathering, please review the methodology for mystery shopping) Searches across a range of different web sources (below) Figure 5: Step-by-step approach for data gathering Retailer websites Product prices Guarantee costs Price comparison tools Product prices Guarantee costs Product guarantee providers Guarantee costs Online shopping catalogues Product prices Guarantee costs The justification for this procedure was as follows: This approach allowed the consortium to conduct price collection across 30 countries within the constraints set by the specificities of each market. Based on preliminary examination of the market, it was understood that at least some retailers and providers did provide price data online. 68

69 A6.2.2 Target price collection The follow price collection targets were proposed on a reasonable effort basis: 72 Guarantee prices from retailers, being: a. 36 for brown and grey goods b. 36 for white goods 2 Guarantee prices for direct sellers of laptops/notebooks (Specifications inch screen, GHz processor, 3-6 GB memory, >500GB HD, in value) a. 1 price for a HP guarantee (HP Pavilion series laptop) b. 1 price for a Dell guarantee (Dell Inspiron series laptop) 2 Guarantee prices for phones a. 1 price for an Apple iphone 5 b. 1 price for a Samsung Galaxy S5 10 Guarantee prices for Cars a. Volkswagen Golf b. Ford Fiesta c. Renault Clio d. Fiat 500 e. Opel / Vauxhall Corsa f. Citroen C3 g. Peugeot 208 h. Skoda Octavia i. Nissan Qashqai j. Audi A3 This equated to 86 records per country for 30 countries, or a maximum of 2,580 records overall. Multiple price listings under a single paid-for guarantee product (i.e. one offering a range of prices) were to be counted as multiple price records. For the specific types of data that were gathered, please see the table that follows on the next page. Risks associated with this approach Prior to engaging with the price collection, it was recognised that there would be a number of risks related to this approach. It was speculated that these risks could include: The market for paid-for guarantees not being developed in the target country, therefore prices not being available; Paid-for guarantees may be sold, but may not be sold online or show the prices online, or have other restrictions; Paid-for guarantees may be entirely restricted to an offline Point of Sale (POS) environment and may be therefore inaccessible to researchers doing desk research; Other barriers, unknown at the time of the methodology design, which would prevent researchers from being able to find meaningful data; or Budget limitations precluding the study from reaching a goal of 86 records per country. 69

70 Table 21: Data collected and instructions addressed to the native researchers Variable Instructions Main characteristics Country Countries of the EU28 plus Norway and Iceland Product Type Product(s) covered by the guarantee. Single observation (e.g. TV) or bundled prices (e.g. all brown goods) are valid Manufacturer The manufacturer name (e.g. Samsung ). Manufacturer from the product which is covered by the extended guarantee Retailer The retailer name (e.g. Amazon.co.uk ). Market agent which sells the extended guarantee (and underlying product) Guarantee Product Provider The insurer, insurance broker or manufacturer The market agent responsible to back the extended guarantee Product price Input price in Product lower price, or Product upper price, if the extended guarantee is Records the price of the product being offered for certain price ranges or if the price can change when services are added (e.g. the guaranteed in the case of a single price. purchase of a car) Paid-for Guarantee price Records the price of the guarantee. Input not available if not published online, but record the observation Relative guarantee price (upper and lower) Legal Guarantee Stated Duration Remedies Insurance services Guarantee type Source Fixed formula: percentage price of the guarantee relative to the product price. Is the legal guarantee stated or displayed with the product or juxtaposed with the ads? The duration of the paid-for guarantee. Repair Replace Refund type (partial or full) Accident Theft coverage Insurance-based guarantee Non insurance-based guarantee Link to guarantee Link to Terms & Conditions Relative price of the extended guarantee to the underlying covered product price. Low and upper according to whether the product price is a range (e.g. from 150 to 300) Detect if the consumer is informed about statutory rights on the purchase of consumer goods Add information on whether the duration period is Parallel to the minimum 2-years of legal guarantee, or on the contrary, it runs in sequence. Detect which remedies are associated with the extended guarantee. If not clearer from the advertisement, check terms and conditions. Record if the extended guarantee offers these additional services Check to see if the product is insurance-based, Non-insurance based, Hybrid (i.e. a mix), or Unclear, where unsure of its typology. Comments - add additional aspects which are considered relevant to be mentioned (e.g. misleading advertisement observed, information on the commercial guarantee, etc.). 70

71 A6.2.3 Price collection Issues faced We noted during the exercise that there are great variations in the availability of guarantee price data online, and our analysis should be read with the following considerations: The underlying data should not be considered a statistically robust representation of pricing practices for guarantee products universally, as it was restricted to price gathering online for 30 countries and data gathered in-store for 7 countries. For the most part it should be viewed as an analysis of published prices. Some countries have a disproportionately high share of price data. For example, in the United Kingdom, the Office of Fair Trade was involved with the set-up of the website 98, and naturally this provided a disproportionately large amount of price data to the study. However, we found no other similar tools in any other country. Data was collected from both inside and outside of the Eurozone (however this had no effect on price analysis, given that all price observations have been converted to euros 99 ). For a number of markets, we know that paid-for guarantees are sold, but the prices are not available online, and therefore could not be retrieved. For example, the guarantee products are advertised online, but a consumer must ask in-store for details. For some of the manufacturers who sell direct to consumers (e.g. Dell, HP, Apple, Samsung), we have noted that the price data does not appear to be systematically available in all countries. A6.2.4 Overall results of the price collection exercise Overall, we obtained 2,796 prices 100, which was slightly higher (circa 8%) than the target number of 2,580 prices. However, as the table below shows, the distribution of these prices was highly uneven. In some markets, price data was simply not published very often, although we did find references to guarantee products on websites, and as such we know paid-for guarantees are sold in that market. Some other markets (the UK, for instance) had a lot of price data available online. The following table displays the number of prices gathered by EU Member State, Norway and Iceland, for all good categories (brown, grey, white goods and cars). As can be seen, a relatively low number of websites, 373 in total, yielded a high number of prices (just below 7.5 prices per website on average). This was due to the effects of retailer guarantee products having multiple prices, and the extended warranty price comparison website from the UK, which concentrated hundreds of prices into one source. However, this low ratio of websites to prices was to be expected, given that paid-for guarantees are sold only by a few market players and within a relatively concentrated market. 98 Please see the Terms and Conditions of the website which makes reference to the Office of Fair Trading, 99 The exchange rate was obtained from XE ( for different time points during July The exchange rate for Bulgaria, (06/07/2015); Czech Republic, (06/07/2015); Denmark, (15/06/2015); Hungary, (06/07/2015); Poland, (06/07/2015); Sweden, (06/07/2015); United Kingdom, (06/07/2015); Norway, (06/07/2015); and Iceland, (06/07/2015). The remaining no-eurozone countries are Croatia and Romania, but they have no price data to convert into euros. 100 Equivalent to 2,485 price observations for brown, grey and white goods, and 311 for cars. 71

72 Table 22: Total prices recorded by market agent and country Total number of prices recorded Non-car manufacturer w/prices Car manufacturer w/prices Retailer w/prices Guarantee product provider Austria Belgium Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Norway Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom Total In the above table, the 69 guarantee product providers (typically insurance companies) were identified from within the total number of 373 websites. 72

73 A6.3 Consumer survey The consumer survey covered the 28 EU Member States, Norway and Iceland. The survey was conducted online in all countries where online penetration is sufficient to ensure the required number of interviews and quality of the sample. This applied to 26 of the 28 EU Member States, plus Norway and Iceland. In Cyprus and Malta, the survey was conducted using Computer Aided Telephone Interviewing (CATI). Fieldwork took place between 28 May and 19 June 2015 (except in Malta, where fieldwork was completed on 25 June). A6.3.1 Interview length The survey included a standard online questionnaire which took respondents on average 14 minutes to complete online (excluding the experiment, see Task 5) and which took interviewers about 20 minutes to finish via CATI. In total, 28,160 respondents completed the consumer survey. The table below shows interview length per country; countries highlighted in grey are the ones with an experiment. Table 23: Average survey time Country Average interview length in minutes Austria 14 min. Belgium 13 min. Bulgaria 15 min. Croatia 14 min. Cyprus 18 min. Czech Republic 14 (30*) min. Denmark 13 min. Estonia 14 min. Finland 14 min. France 13 (26*) min. Germany 13 (26*) min. Greece 14 min. Hungary 13 min. Iceland 14 min. Ireland 13 min. Italy 13 (27*) min. Latvia 14 min. Lithuania 13 min. Luxembourg 14 min. Malta 22 min. Netherlands 14 min. Norway 14 min. Poland 12 (26*) min. Portugal 14 min. Romania 15 (29*) min. Slovakia 15 min. Slovenia 13 min. Spain 14 min. Sweden 13 (27*) min. United Kingdom 13 (26*) min. * In brackets duration with experiment 73

74 A6.3.2 Pilot study A pilot study was conducted to test the length of the questionnaire and to identify if respondents had any difficulties answering the questions. The pilot was run in the UK as the master documents were designed in English. In total, 101 pilot interviews were completed between 18 March and 24 March 2015 using the Ipsos online panel in the UK. Quotas were set on age, gender, region, education and urbanisation (based on the general online population aged 18 years old or over) to ensure that a broad range of respondents took part in the pilot survey. The average length of the pilot questionnaire was slightly above 13 minutes (including the behavioural experiment this was slightly less than 27 minutes, see Task 5). Based on the pilot results, and in consultation with the DG JUST, Ipsos implemented a limited number of changes to improve the consumer questionnaire for the main stage. These changes related to the wording and routing of the questions. The most notable changes were that questions 6a and 6b were dropped and integrated with questions 4a and 4b; question 37 was changed to a grid question; and question 42 was added on the request of DG JUST. A6.3.3 Translation After the changes in comparison to the pilot were agreed upon and all the materials from the survey were signed off, the questionnaire (and experiment, see Task 5) were translated in the local language(s) of each country. Unique country and language versions were produced. Below is the list of countries with their corresponding language(s): Table 24: County and language Country Language Austria German (Austrian) Belgium French (Belgium) & Dutch (Belgium) Bulgaria Bulgarian Cyprus Greek (Cyprus) Czech Republic Czech Denmark Danish Estonia Estonian Finland Finnish France French (France) Germany German (Germany) Greece Greek Hungary Hungarian Ireland English Iceland Icelandic Italy Italian Latvia Latvian Lithuania Lithuanian Luxembourg Luxembourgish & French (Luxembourg) Malta Maltese & English Netherlands Dutch (Netherlands) Norway Norwegian 74

75 Table 24: County and language Country Language Poland Polish Portugal Portuguese Romania Romanian Slovakia Slovakian Slovenia Slovenian Spain Spanish Sweden Swedish UK English A6.3.4 Fieldwork execution and panel The on the ground execution of the online fieldwork was carried out by the Ipsos Interactive Service Bureau (IIS). All the work conducted by IIS was managed centrally, with one scripting, data collection and data delivery process. The main stage fieldwork was conducted using Ipsos online panels where possible. In some countries, partner panels were used, either due to Ipsos not currently having a panel in that country, or the Ipsos panel being too small to achieve the required number of interviews. All selected polling institutes are well known for the quality of their network and are involved in numerous multilingual and multinational surveys. All are ESOMAR members as well. To prevent scripting errors, the same script was used by all panel partners. The table below shows where ISS and external panels were used: Table 25: IIS and external panels Austria Belgium Bulgaria Croatia Country External panel IIS panel Czech Republic Bilendi JTN Ipsos Adria Ipsos CZ Denmark Userneeds X Estonia Norstat Finland Userneeds X France Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania JTN MMR Userneeds Norstat Norstat X X X X X 75

76 Table 25: IIS and external panels Luxembourg TNS Norway Userneeds X Poland X Portugal CINT Romania X Slovakia Narodni Slovenia Ipsos Adria Spain X Sweden X Netherlands X United Kingdom X CAWI Quality processes Ipsos has developed an internal four-stage data quality process called ipi4 (Ipsos Panel Integrity). One of these processes is based at the survey level, and implemented whether we use our own or partner sample. The four components, with comparable quality measures Research Now perform, are detailed below. ipi Pre-panel stage: Before becoming panel members, applicants are scrutinized by a complex validation system. No one can join the panel without successfully passing all of the checks. These include checking for duplicates, CAPTCHA security code, screening out individuals who work in market research, validating personal and geographical details. The external panels have similar processes at panellists registration. Duplicate detection is implemented on all panels, as are CAPTCHA security codes and deduplicating against a black list. A double opt in recruitment ensures that and personal details are verified. ipi Early-panel stage: Shortly after joining the panel, new members are tested again with a short survey. New panellists who are most likely to make intentional or unintentional errors on future surveys are deactivated at an early stage. This survey checks anomalies in answers and detects fraudulent behaviour. Respondents who obtain high anomaly scores or provide a large number of errors are removed from the panel. The ipi Survey module: This module identifies low engagement behaviour during a survey. The quality of answers is ensured by measures such as duplicate detection using the RelevantID digital fingerprinting, geo-ip validation and speeding. These survey standards are implemented on all surveys IIS manages, no matter the sample source. RELEVANTID removes duplicates from live surveys, based on digital fingerprinting criteria. The module is applied on all surveys conducted by IIS, including those where mixed/external panel sources are used. This ensures that each respondent will only be selected once for a survey, even if they are a member of more than one panel. COUNTRY GEO-IP validation ensures the panellist is in the country we expect them to be in. 76

77 ipi SPEEDERS are monitored for every survey and respondent experience is measured. ipi Ongoing panel stage: IIS monitors and track panellists behaviour history across all surveys. IIS employs purging procedures based on behaviour history to remove bad and inactive panellists from our active panel. Reasons for removal include: hard bounce s, inactivity, fraudulent and inconsistent data. Our partners perform many similar checks and cleaning procedures on their panels; they purge respondents with hard bounce s, inactive respondents and track and monitor inconsistencies which are flagged and removed as appropriate. All surveys managed by IIS (no matter the sample source) are hosted in Rackspace, a managed hosting facility. The servers and network infrastructure and physically located in the UK. Rackspace guarantees recovery of hardware failure within one hour, ensures zero downtime, its facility security is strictly managed and power back up is guaranteed. Sample The target audience of the consumer survey was the general online population, aged 18 and above. Quotas were set upon age, gender and region, to ensure that the sample in each country was representative of the general 18+ population. The age and gender quotas were based on 2014 Eurostat data of the years old general population. The 65 and older population was for feasibility reasons (low Internet usage among this group) not specifically targeted with a quota, but people from this age group did participate in the survey. In all but four countries the target sample size was 1,000 interviews. In Cyprus, Iceland, Luxembourg and Malta, a sample of 500 interviewed was used. The table below presents the targeted sample size and the number of completed interviews per country. Table 26: Sample size Targeted Achieved Austria 1,000 1,004 Belgium 1,000 1,004 Bulgaria 1,000 1,000 Croatia 1,000 1,003 Cyprus Czech Republic 1,000 1,004 Denmark 1,000 1,004 Estonia 1,000 1,004 Finland 1,000 1,002 France 1,000 1,005 Germany 1,000 1,003 Greece 1,000 1,001 Hungary 1,000 1,004 Iceland Ireland 1,000 1,004 Italy 1,000 1,005 77

78 Table 26: Sample size Targeted Achieved Latvia 500 1,004 Lithuania 1,000 1,004 Luxembourg Malta Netherlands 1,000 1,004 Norway 1,000 1,004 Poland 1,000 1,004 Portugal 1,000 1,001 Romania 1,000 1,005 Slovakia 1,000 1,004 Slovenia 1,000 1,004 Spain 1,000 1,004 Sweden 1,000 1,004 United Kingdom 1,000 1,003 Weighting For this survey, the data was weighted in two ways: Within each country the data was weighted by demographic variables to correct for any biases in the achieved sample profile compared to known population statistics. Across countries, the data was weighted to ensure that each country is represented according to its population size in the EU-wide results. Analysis of the achieved sample achieved shows that: For age and region targets some problems occurred in a handful of countries. In 21 out of 30 countries, the profile of the final sample in terms of age quite closely followed the target statistics. Small differences showed up between the achieved sample and the target on the 60+ age group, as older persons are more difficult to reach with online surveys in most countries. For the 60+ group, the needed weighting adjustment stayed below 2 for these countries. In 9 countries (BG, EL, IE, LV, PT, RO, SI, ES, UK), some weighting adjustments (between 2 and 3) were used to balance the fact that older people (60+) are underrepresented in some online panels. Only in the case of BG, EL and SI, this implies that the 60+ population (66+ in SI) remains slightly underrepresented in the weighted sample, as we limited the maximum weighting adjustments to 3 to prevent statistical distortions. The small differences between the achieved sample and the targets are largely related to the relaxation of the quotas at the end of fieldwork to reach the overall sample size in a reasonable amount of time and within budget. 78

79 A6.4 Mystery shopping exercise The mystery shopping exercise covered 8 EU Member States: the Czech Republic, France, Germany, Italy, Poland, Romania, Sweden and the UK. Fieldwork was carried out by Helion, a market research company specialised in consumer experience related market research, and consisted of In-store, telephone and online (web shop) mystery visits. The mystery shoppers (henceforth just called shoppers ) were extensively briefed about the legal and guarantee rules in the EU and the details of the scenario they had to role-play (e.g. how to introduce themselves, how to describe the problem with the product, how to evaluate the responses of the retailers etc.). A6.4.1 Scenarios The mystery shopping exercise consisted of two main scenarios (A & B), produced to replicate two distinct consumer experiences. Scenario A was designed to imitate the online and In-store (offline) consumer experiences when buying a product and seeking and comparing information on the legal and commercial guarantee(s) for this product. Scenario B was designed to replicate the consumer experience when having a problem with a specific product and trying to obtain information (either in a store or by phone) about his or her legal guarantee rights in relation to this product. Below an overview of the two scenarios and their main goals is presented. Scenario A: Seeking and comparing information Assess the way in which legal and commercial guarantees are communicated to consumers i.e. if the communication provided in the (online & offline ) shop and by the seller is clear, reliable, fair and not misleading. Assess whether or not the retailers provide the information on legal and commercial guarantees as a matter of course, or whether they have to be asked. Collect prices and other details (name/length) of up to three commercial guarantees per shop. Collect terms and conditions commercial guarantees (only online). Scenario B: Executing one s rights in case of a faulty product Assess retailers awareness of, and compliance with the applicable rules in case of a (role-played) problem with a product. Evaluate if sellers comply with the rules for hierarchy of remedies, burden of proof, the moment at which the non-conformity must have existed, etc. A6.4.2 Sampling plan A specific sampling plan was designed for both scenarios, with the objective to collect a minimum number of observations per product category, per scenario and per channel (online, In-store and telephone) evaluated. Below an overview of the sampling design per scenario is presented. Scenario A: Seeking and comparing information Contact channel: 75% In-store visits and 25% online enquiries. Total number of evaluations: 960 mystery actions/evaluations across eight product categories (televisions, mobile phones, laptops/notepads, 79

80 cameras, vacuum cleaners, refrigerators, washing machines, and new cars (the latter only In-store)). Sampling plan for In-store visits: o 720 evaluations in total (across products and countries), o 90 evaluations per country (across products) 72 large retailers and 18 independents o 90 evaluations per product (across countries), or o 11/12 evaluations per product and per country. Sampling plan for online enquiries: o 240 evaluations in total (across products and countries), or o 30 evaluations per country (across products). o 4/5 evaluations per product and per country. Setup Scenario B: Executing one s rights in case of a faulty product Contact channel: 40% In-store visits and 60% mystery phone calls Total number of evaluations: 640 mystery actions/evaluations across eight product scenarios. Sampling plan: o 80 evaluations per country (across products), o 80 evaluations per product (across countries), or o 10 evaluations per product and per country (6 phone calls & 4 Instore visits). o In each country, per product category, 10 shops are evaluated (8 local branches of large retailers and 2 small (independent) sellers). A6.4.3 Products covered The goal of the mystery shopping was to cover the following markets: Electronic products ICT products Small electrical household appliances Large electrical household appliances Clothing and footwear New cars The following products were selected to represent these markets: Televisions Scenario A & B Mobile phones Scenario A & B Laptops Scenario A & B Cameras Scenario A & B Vacuum cleaners Scenario A & B Refrigerators Scenario A & B Washing machines Scenario A & B Back packs (clothing) Scenario B New cars Scenario A Back packs were chosen as a substitution for clothing to prevent shoppers having to ask about their guarantee rights for a product, for example a shirt, for which this might have been a highly unusual thing to ask. Bags were also chosen to avoid picking a niche product (as for example hiking boots would have been). In Scenario A, clothing 80

81 was not included in the list of products; the main reason being that there does not seem to be a market for commercial guarantees for clothing. For practical reasons cars were only included in Scenario A. Cars were not included in Scenario B because role-playing a scenario in which a mystery shopper needs to ask about his guarantee rights in relation to a faulty car is in practise impossible, as car dealers will always ask detailed information about the car, such as the number plate number. A6.4.4 Product scenarios Scenario A The products played an especially important role for Scenario A, as a key aim of this scenario was to collect prices of guarantees and products. To be able to better compare guarantee prices while leaving the shoppers some flexibility when it comes to choosing a product, each mystery shopper was provided with a list of product features and a price range in which the product needed to fit. The shoppers were free to choose the brand of the product (except in the case of cars and mobile phones, see below). If no product with the required prices and/or features was available, shoppers were instructed to choose the most similar available model. For Scenario A, we strived to include products with the typical features of the most popular products in the market. To identify average products we used as a starting point the Eurostat Detailed average prices report (2014). 101 This Eurostat report measures price differences in the EU by comparing popular products in the EU and provides a list of features of these products For this report we used these features (wherever possible) in combination with the average prices for products with these feature on the German site of Amazon (Amazon.de). An EU-wide price range was created by looking at the price differences in the EU and by adding and deducting 10% to/from the price at each side of the scale. 104 Finally the prices were recalculated to the local currencies. Eurostat did not provide price data on cars and mobile phones. This was not problematic, as these are both concentrated markets (dominated by a small number of companies), which makes finding comparable products relatively easy. In relation to mobile phones, we used two models that have been identified as bestselling models in the EU and that we expected to be available in most stores that were part of the mystery shopping. 105 These models were: Apple iphone 5 Samsung Galaxy S5 101 The most recent version of the Detailed average prices report is from October 2014, which includes data from Source: pdf/32da5ec2-23b beda-5e823de3f According to the Detailed average prices report, in 2013, the NSIs [National Statistical offices] in the EU Member States, Iceland, Norway, Switzerland and Turkey were asked to provide DAP [Detailed Average Prices] for a list of 198 products. These were selected because they were assumed to be both available and relevant (representative) in most countries. The product descriptions were based on recent PPP exercises. 103 Eurostat, Detailed average prices report (2014), p To do so, Eurostat Price level indices for household appliances and electrical and optical equipment were used. This data was from 2013 (the last data available, as of ). 105 IDC, 2014, Smartphone Vendor Market Share, Q

82 Shoppers were instructed to select a model in a comparable price range when these two phones were not available. The price range for mobile phones was calculated in a similar way as the price ranges for the other products (except cars). Mystery shoppers were instructed to visit car dealers of the four best-selling car models in the EU, see the list below, based on the data from JATO 106. For the sake of diversity, we replaced the second Volkswagen in the list with the best-selling model and brand not in the top 4; the Fiat 500. Volkswagen Golf Ford Fiesta Renault Clio Fiat 500 [replaces Volkswagen Polo] Table 27: Price range & products for mystery shopping exercise Product Features/ Model Price range Compact digital camera Laptop 3" screen 12-15,9 MP 15"-16" screen 2,1-2,5GHz processor 3-6GB Memory >500GB Hard disk Television Fridge-freezer Washing machine Vacuum cleaner 77-99cm screen LED-LCD screen 2 doors Energy class A (A,A+,A++, A+++) Combined capacity l 4 stars energy class A (A+,A++, A+++) 6-7kg wash capacity floor model W paper bag Car Volkswagen Golf Ford Fiesta Renault Clio Fiat 500 [replaces Volkswagen Polo] Mobile Phone Apple iphone 5 Samsung Galaxy S NA* * Price range not needed for cars

83 Scenario B In the case of Scenario B, which did not include a price collection exercise, the product features were not used. Instead, for Scenario B, products were related to a set of problems, or sub-scenarios, that shoppers were instructed to role-play; eight subscenarios were used: 1. a newly bought camera stops working after 5 months of normal usage 2. a newly bought TV stops working after 9 months of normal usage 3. a newly bought fridge stops working after 18 months 4. a newly bought vacuum cleaner stops working after 9 months of normal usage; the manufacturer's guarantee was for 12 months 5. a newly bought washing machine stops working after 18 months of normal usage; the manufacturer's guarantee was for 12 months 6. 5 months after buying a new mobile phone, its battery does no longer charge months after buying his new laptop, you realise that it has less memory than the seller had described when he bought it 8. 3 months after buying a new backpack, the stitching came lose and the zipper no longer works The first three sub-scenarios and sub-scenario 8 are all about a product that stops working, but the moment this happens differs. These sub-scenarios are especially suitable to study if sellers comply with for example the EU rule that the legal guarantee is valid for a minimum period of two years and give insight in the working of the burden of proof (which shifts from the seller to the consumer six months after purchase). Sub-scenario 8 may warrant extra attention because of the particular nature of the good (a backpack). Sub-scenario 4 and 5 follow a similar design, but mentioned a manufacturer s guarantee, which in the case of sub-scenario 5 had expired. These sub-scenarios specifically allow to measure if mentioning a manufacturer s guarantee will have an impact on the answers sellers provide. Sub-scenario 6 was designed to look at sellers responses when it comes to spare parts. Sub-scenario 7 focussed on non-conformity. A6.4.5 Sampling of stores For the visits and calls to independent stores in both Scenario A & B, shoppers were instructed to identify and visit or call small stores 107 in their own region. For the to-be-visited In-store chains, in every country, the biggest relevant stores were selected, based on their number of employees. 108 These were mostly hypermarkets and large consumer electronics retailers. In each country the stores of at least three different major chains were pre-selected, excluding car dealers and online stores. For the online visits relevant large online retailers (Amazon, Pixmania etc.) active on the local market were added. The specific locations (i.e. the exact street addresses) of the to-be-visited large chains were pre-selected; assuring that in each country a geographic balance was maintained between the visited shops. 107 These were in principle smaller (less than 20 employees) stores with one location, although small stores with a number of locations in a specific geographical region (not nationwide) were also accepted. This could e.g. be a camera store with five branches in a single city. 108 A list from OneSource was used, with the retailers with more than 2500 employees per EU Member State. 83

84 A6.5 Behavioural experiment design The online experiment was conducted in conjunction with the consumer survey in eight countries; these are: the Czech Republic, Sweden, France, Germany, Italy, Poland, Romania and the UK. This Annex presents the design of the behavioural experiment. The experiment is broken into four parts: Part A is a choice experiment where respondents may choose to purchase a commercial guarantee or not. Part B is a willingness-to-pay experiment. Part C is a comprehension test where respondents are required to correctly answer questions about the features of legal guarantees (comprehension) including burden of proof. Part D includes follow-up questions on the reasoning/motivations for the decisions made in the experiment and cognitive ability questions. A6.5.1 Timing of willingness to pay and choice experiment When designing behavioural experiments, the ordering of tasks is very important. This is because information provided to respondents in a previous task may influence their behaviour in a subsequent task. This is referred to as order effects in the behavioural literature. The standard approach to minimising order effects is to randomise the task order and to then control for the order in which respondents completed the tasks in the subsequent data analysis. In the early stage of design for these commercial guarantee experiments we had proposed to randomise the order of the willingness-to-pay and the choice experiment across respondents; however, as we proceeded with the design this randomisation was dropped. The reason for not randomising was because information provided to respondents in the choice experiment may have a strong influence on willingness-topay outcomes. This influence between the choice and the willingness-to-pay arises because we introduced an information treatment into the choice experiment. That is, half of the respondents in the choice experiment were given explicit information about the existence and length of legal guarantees, and half of the respondents are not. Providing information on the legal guarantee may be expected to impact respondents willingness-to-pay for a commercial guarantee. Therefore, we may expect that the respondents that were explicitly informed of the commercial guarantee (in the choice experiment) to have a lower WTP on average compared to those that are not. 109 While prior knowledge of the legal guarantee in real markets may indeed impact WTP in these real markets, in our experiment set-up we cannot control explicitly for this. Therefore, to ensure a robust design all respondents, they completed the WTP experiment first and the choice experiment second. We then control for any prior knowledge with question 35a of the consumer questionnaire included towards the end of the consumer questionnaire that asks all respondents explicitly about prior knowledge of legal guarantees. 109 One possible outcome of placing the willingness-to-pay experiment first is that choices made in the willingness to pay experiment may influence those made in the choice experiment. Specifically, whether choices made in the willingness-to-pay experiment may influence the decision to purchase a commercial guarantee. However, this influence is likely to be less strong. The willingness-to-pay experiment provides less explicit information to respondents than the choice experiment does, and respondents are thus less likely to be influenced when going from willingness-to-pay to choice experiment. 84

85 A6.5.2 Part A: Choice Experiment The choice experiment tests the impact of varying information presentation on: consumers ability to correctly choose to purchase (or not) a commercial guarantee on top of the legal guarantee; and, if a commercial guarantee is purchased, consumers ability to select the best (optimal) commercial guarantee from the set offered in the experiment. A correct decision is one where the respondent chooses the commercial guarantee with the best or fairest price, between 3 on offer. This has two components: the respondent chooses to purchase a commercial guarantee when the price is equal to or lower than the expected loss in case of an adverse event (the fair price), or given the choice between 3 commercial guarantee offers, she chooses the guarantee with the price closest to the expected loss in case of an adverse event Key features of the choice experiment design are the following: The primary products: product-specific analysis will be carried out for two primary products mobile phones and washing machines. For these products, commercial guarantees will be varied along the dimensions of price, length of guarantee (for washing machines only 110 ), and other product-specific contract features. 111 Treatments: The treatments are designed so that we can investigate the impact of presenting information in different ways on respondent choice. Treatments featured are: Lack of information about the existence of legal guarantees (with the alternative practice being explicit information about the existence and length of legal guarantees at EU level of 2 years. In Sweden the length is 3 years. Complex contracts (with the alternative practice being simplified contracts); Text displays of contracts (with the alternative practice being graphical displays). Commercial guarantee features In order to set-up the experiment we completed a targeted desk-based review of mobile phone and washing machine commercial guarantees. In this section, we present these key features. Commercial guarantee features specific to mobile phones Mobile phone commercial guarantee contracts tend to vary in terms of the circumstances that are covered. Mobile phone commercial guarantees do not vary (very much) in terms of length (years of coverage). We have found in our targeted web sweep that commercial guarantees offered by manufacturers can be up to 3 years. 110 Mobile phone contracts will be set to 3 years. 111 Burden of proof does not vary in commercial guarantees. Burden of proof varies in legal guarantees and, as such, we test burden of proof in the comprehension test not the choice experiment, 85

86 Respondents will be informed of the duration of the commercial guarantee, along with the features described below. The key circumstances that vary in mobile phone commercial guarantees are: Hardware service Software services and operating system upgrades Excess amount in case of successful claims The following table sets out, in more detail, contract features specific to mobile phones. These features consist of general information present in commercial guarantees for mobile phones. A sub-set of these have been selected for inclusion in the behavioural experiment. This is explained further below in the treatment allocation sub-section. We also identify which features could be presented in graphical form. This is so that we can test the impact of presenting information in text versus graphical form on choice. 86

87 Table 28: Product specific features for mobile phones Specific features for mobile phone guarantees Price-related Excess payment Size of payment often depends on initial product price Length-related: Minimum duration of contract (12 months rolling) Option to cancel (opt-in/opt-out) Coverage: Breakdown coverage Breakage and drop-damages Damage from contact with liquids Damage from sand Damages from handling errors Excess voltage Theft and loss coverage Robbery / break-in-and-theft (e.g. from cars) Theft Loss Phone charges incurred after loss or theft (i.e. illegal use) Repair or exchange in case of damage through wear (including battery) World-wide coverage (but services can mostly only be claimed in county of purchase) World-wide coverage for holidays: replacement phone while on holiday (but at own cost...) Service-related: 24-hour exchange Repair or exchange at no cost Full price reimbursement if repair is not possible Hotline service (sometimes free for 24h) Service to lock your SIM card Immediate in-store exchange Option to receive a loan unit until repaired or replaced Graphical representation possible? Y N Held constant Y Y Y Y Y Y Y Y Y Y N N N N N N Y N N Commercial guarantee features specific to washing machines Washing machine commercial guarantees differ from mobile phone commercial guarantees. Washing machine commercial guarantees tend to always cover the same circumstances. These guarantees vary in terms of the remedies available and the length of guarantee. 87

88 The key features of washing machine commercial guarantees that vary are the following: Length (2 to 3 years or 2 to 5 years) Home repair No-cost exchange or repair Sometimes inclusive of labour journey costs The following table sets out, in more detail, contract features specific to washing machines. These features consist of general information present in commercial guarantees for washing machines. A sub-set of these have been selected for inclusion in the behavioural experiment. This is explained further below in the treatment allocation sub-section. Again, we present features that may be suitable for graphical representation. Table 29: Product specific features for washing machines Specific features for washing machine guarantees Price-related Excess payment (as % of price, without discounts) Size of payment often depends on initial product price Length-related: Minimum duration of contract Option to cancel Coverage: Manufacturing fault Material defect Service-related: Repair or exchange at no cost Sometimes repair or exchange at no cost except paying costs of customer service Alternative team s full journey price reimbursement if repair is not possible On-site repairs Home service Hotline service (sometimes 24 hours and explicitly free of charge) Hotline service (sometimes 24 hours and explicitly free of charge) Graphical representation possible? Y N N N Y Y N N N Y Y Y Y Choice experiment treatments The choice experiment was designed to answer the following questions: Are consumers more likely to make optimal decisions when contracts are simpler? Are consumers more likely to make optimal decisions when contracts are visually striking, in graphical rather than text format? Are consumers more likely to make optimal decisions when informed of the existence and/or length of legal guarantees? 88

89 Introducing time pressure in decision making The decision to purchase commercial guarantees can either be made online (or otherwise away from the point of sale), or at the point of sale of the primary product. In this case, consumers may be under pressure to make quick decisions regarding whether to purchase commercial guarantees. There has been a discussion about whether to incorporate this time pressure in the experiment (for example, by instructing respondents that they must make their choice within a specified time period, after which the screen goes blank). While this can be done, the decision was made to leave this element out of the experiment. This is because previous experience has demonstrated that if respondents are under pressure to make decisions, the quality of decision-making is, on average, worse across all treatments. In this experiment, we are concerned with the impact of information presentation on decision-making. Introducing time-pressure would muddy the outcomes of the experiment and make it harder to interpret the impact of different treatments on decision-making, therefore this design feature is not included in the experiment. Treatment allocation In order to answer the above questions, the following procedure is used: first, the respondents were randomly allocated into two groups: Group 1: Uninformed about the existence of legal guarantees. That is, respondents are not explicitly informed of the existence of legal guarantees. Group 2: Informed about the existence of legal guarantees. In the informed group respondents are told before starting the choice experiment that they are covered by a legal guarantee. The specific text in the experiment is the following: Consumers at European Union level are covered by a legal guarantee, which entitles them to free repair or replacement of their [washing machine/mobile phone] 112 if it breaks down in the first 2 years, and the breakdown was owing to material or manufacturing fault. To account for country specific differences, in Sweden the length of the legal guarantee in the experiment was 3 years. Within each group, respondents were allocated randomly to the following treatments: Text contracts with 2 features Text contracts with 4 features Graphical contracts with 2 features Graphical contracts with 4 features For mobile phones, the following features were tested: Price (retained in the 2-features treatment) Excess in the case of successful claims (retained in the 2-features treatment) Hardware service (dropped from the 2-features treatment) Software service (dropped from the 2-features treatment) 112 The name of the primary product is adapted for each frame. That is, when undertaking the experiment for mobile phones the text includes mobile phones and the same for when doing washing machines. 89

90 For washing machines, the following features were tested: Price (retained in the 2-features treatment) Duration (retained in the 2-features treatment) Excess in the case of successful claims (dropped from the 2-features treatment) Home repair (dropped from the 2-features treatment) In the following table, we set out the features we propose tested for both products, in the 4-feature (4F) and 2-feature (2F) treatments. Items in bold are retained in the 2-features treatments. Table 30: Commercial guarantee features Washing machines Price Price Excess Excess Hardware service Duration Software service Home repair Note: Items in bold are tested in the 2-feature treatments Mobile phones The price for the commercial guarantee remains the same irrespective of whether there are 2 or 4 features that the same deals have same expected costs in both 2F and 4F. Figure 6 sets out the sample-split by information group and treatment, along with the number of respondents in each subgroup. Each respondent completed the choice experiment twice; once for each product. As such, there are 8,000 respondents for each product. Figure 6: Sample split by treatment 90

91 Prior information on legal guarantees Some respondents included in the experiment may have prior knowledge and information about legal guarantees. This means that with the allocation method described in Figure 6, some respondents allocated to the uninformed treatment are not truly uninformed. As such, this prior information may have an impact on behaviour in the experiment. We do not, however, think that this is a problem in the experiment. This is because, in the real world, some consumers will have prior knowledge of the legal guarantee before they choose to buy a commercial guarantee and others will not have this knowledge. We capture in the experiment the real life features of the market from the consumer perspective. The experiment therefore tests the practice of explicitly telling the consumer of the existence of the legal guarantee at the point of sale. We include as question 35a in the consumer questionnaire a question that explicitly asks all respondents about prior knowledge of legal guarantees. Answers to this question can then be used as an explanatory variable in the analysis to determine if this knowledge leads to any differences in behaviour within the experiment. Experiment tasks Respondents in each treatment will complete the following tasks: Round 1: respondents are given a take it or leave it choice, between a commercial guarantee and no commercial guarantee. In round 2, based on the response in round 1, respondents are given the choice between sticking with their original choice or changing to another offer, in which contract features are changed, including the following: o Price, o Length of guarantee (washing machines only), o Excess, o Product-specific contract feature. Informing respondents of breakdown probability and the cost of breakdown At the beginning of the choice experiment respondents were informed that they have bought a product, and will be informed of the price they paid for the product. In addition, respondents are informed at the beginning of the experiment of the probability of breakdown. In the case of mobile phones, respondents will be informed of the probability of breakdown within 2 years and within 3 years. In the case of washing machines, respondents will be informed of the probability of breakdown within the first 2 years, 3 years and 5 years of purchase. This is done because washing machine commercial guarantees often vary in duration. Therefore, respondents are informed of the probability of breakdown within different periods. The probability of breakdown will be calibrated to real world probabilities. Respondents will also be informed of the cost of damage, which we set equal to the price paid for the product. Respondents who are informed of the existence and length of legal guarantees will get the following additional information: if breakdown occurs before the length of the legal guarantee (2 years, 3 years in Sweden) the cost of breakdown is equal to zero. In real life, consumers may not have this information, but instead decide whether or not to purchase commercial guarantees based on their private beliefs about the probability of an adverse event, and the loss in case of an adverse event. In the 91

92 experimental environment, we need to remove the uncertainty around these private beliefs, in order to judge how information presentation affects respondents ability to make correct choices. We have used this approach in a previous study for the UK s Financial Conduct Authority, which was then incorporated into the Market Study and recommendations for General Add-On Insurance. In the case of mobile phones, respondents are told that the probability of breakdown within the first 2 years is 7.5%, and the probability of breakdown within 3 years is 15%. In Sweden, respondents are told that the probability of breakdown within 3 years is 15% and the probability of breakdown within 4 years is 20% (taken from the probability of breakdown of mobile computing devices in the UK, from previous work with the UK s Financial Conduct Authority) In the case of washing machines, respondents are told that the probability of breakdown within the first 5 years of purchase is 7% (taken from the data of breakdown probability for white goods in the UK, collected during previous LE work with the UK s Financial Conduct Authority), 3% occurring within the first two years, 2% between two and three years and 2% between three and five years. In Sweden, respondents are told that the probability of breakdown within the first 5 years of purchase is 7% (taken from the data of breakdown probability for white goods in the UK, collected during previous LE work with the UK s Financial Conduct Authority), 5% occurring within the first three years, 1% between three and four years and 1% between four and five years. The way the offers have been constructed is reasonably complex, and to identify the optimal deal the respondent needs to calculate the expect loss. Further respondents need to calculate the difference in breakdown probability between, for example, 2 and 3 years. DG JUST raised some concern that the complexity of the experiment task may mean that any effect of the treatments are wiped out because people cannot make the optimal choice and may just choose randomly. The guarantee decision in real life is complex, and the experiment provides a stripped down and stylised setting for the choice. However, we do recognise that the choice remains reasonably difficult. We analyse the pilot data to investigate if respondents are picking randomly, the proportion choosing optimally, the proportion improving their choice from round 1 to 2 (even if not the optimal choice), and time taken to make choices. A decision can then be made as to the need, if any, to simplify the task. Experiment incentives The choice experiment is incentivised. If respondents choose the correct option, they get additional survey points. If they do not, they get no additional points. We have revised the previous incentive structure, in which respondents were randomly allocated to different groups, based on the probability of breakdown described in the previous section. We have revised the structure so as to allow for the case in which the choice of no guarantee is the correct one. With the previous incentive structure, if respondents were allocated to the group suffering a loss, and they chose not to purchase a guarantee, they would suffer the loss of the full primary product price even if the correct decision was not to purchase a guarantee. This sets up perverse incentives. In the present setup, as previously stated, before beginning the experiment respondents are informed of the probability of breakdown of their washing machine/mobile phone, as well as the cost of breakdown (set equal to the purchase price of the product). This enables them to calculate their expected loss for all four options (no guarantee, Deal Pink, Deal Purple and Deal Orange) and judge which option has the lowest expected loss. 92

93 Outcome measures The tasks will use the following metrics to assess the ability of consumers to choose the optimal contract: The proportion of consumers that select the best commercial guarantee (or no guarantee) offered in a choice. This targets the objectives: o Consumers ability to select the best offer for a commercial guarantee among a number of different offers; and, o Assess if pre-contractual information is clear and concise to enable comparison between offers. The proportion of consumers that improve their choice between round 1 and round 2, so as to capture improvements in relative choice even if the optimal choice overall is not made. Time taken to complete each task in the experiment: o This acts as a comparative measure of how easy it is find relevant information. o We combine the time measure with the variable correct choice (or improvement in relative choice) to provide us with a relative measure of ease of information in guiding correct choice. Choice experiment rounds Each respondent completed the choice experiment for both mobile phones and washing machines. Respondents faced a different treatment for each product. Before starting the choice experiment, respondents were given a profile for the product they were about to complete the experiment for. The profile will inform the respondent about price, the likelihood of non-conformity/damage, and the costs associated with the nonconformity/damage. In each round of the experiment (with two rounds implemented for each product), respondents were faced with different choices regarding a range of different commercial guarantees and the option not to purchase a commercial guarantee for the new mobile phone / washing machine (the option not to purchase a commercial is always offered in round 1 only). The commercial guarantee options presented to respondents varied with deals containing either two or four features. The experiment design also varied in layout, where commercial guarantees are presented in either graphical or text format. Routing of respondents In the choice experiment, after being allocated to the treatments and randomisations described above, respondents go through the following stages: A screen in which respondents are given a brief explanation of the task and incentives (If respondents choose the correct option, they get additional survey points. If they do not, they get no additional points); (For informed respondents only): a screen in which respondents are informed of the existence and length of legal guarantees; Round One, in which respondents choose whether or not to purchase a commercial guarantee; Round Two, in which respondents choose between their Round One choice and two other commercial guarantees; A set of questions on their motivation for choosing (or not choosing) a commercial guarantee; 93

94 Questions regarding their experience of the behavioural experience; and Depending on their response to the previous question, why they would describe themselves as satisfied or dissatisfied. In the following figure, we illustrate the routing followed in the Choice Experiment. Figure 7: Routing of respondents in choice experiment Key: INTRODUCTION SCREEN Screen shown to respondent Treatment Informed Not Informed Reminder of legal guarantee Round 1 + Reminder Round 1 After this point, options/route are the same for informed and not informed respondents, except that informed respondents receive a reminder of the length and coverage of legal guarantees in Round 1 and Round 2 Key: Question Round 1 Treatment No commercial guarantee Commercial guarantee Choices made by respondent Round 2 Round 2 Final point of route Stay Switch Stay Switch Why not buy Why buy Why buy Why buy Experience Experience Experience Experience Dissatisfied Satisfied Dissatisfied Satisfied Dissatisfied Satisfied Dissatisfied Satisfied Why dissatisfied Why satisfied Why dissatisfied Why satisfied Why dissatisfied Why satisfied Why dissatisfied Why satisfied 94

95 Impact of product sequence As stated before, respondents completed the cycle for both products. The benefit of this approach is that we have a larger sample. One possibility, if respondents complete the choice experiment for both products, is that decisions made for the first product may influence decisions made for the second- for example, if a respondent chooses to purchase a commercial guarantee for washing machines, she may be more inclined to buy a commercial guarantee for mobile phones. One way to address this in the experimental setup is to randomise the product order for participants, such that any order effect cancels out on average across all participants. When analysing experimental data, we can include a control variable for product order, to see if product order affects behaviour. 113 Impact of guarantee sequence In real markets it may sometimes be best to buy a commercial guarantee and in other situations it may not be. In order to mirror this situation in the experiment we randomise the set of guarantee offers that respondents see, so that half of the respondents see a set of guarantees where the correct choice is no guarantee, and half see a set of guarantees where one of the guarantees gives a higher payoff than the no guarantee choice. Respondents in the experiment may have a tendency to choose the first guarantee or the last guarantee they see. In order to remove this possible effect we randomise the position of the best/optimal guarantee. That is, in round 1 some respondents will see the best guarantee and others will see the best guarantee in round 2. The exception to this is when the optimal commercial guarantee is the no guarantee option. In this case the optimal choice is always seen in round 1. This is an outcome of the design as it was considered important that respondents should have an option to purchase or not purchase a commercial guarantee, and it made sense to provide them with this option in round 1. The issue arises that respondents in this group do not have the option to change their choice and choose the optimal commercial guarantee in round 2. In other words, they become locked on a sub-optimal path. To overcome this problem, in the analysis we look at respondents who improved their choice from round 1 to round 2 even if they did not choose the optimal commercial guarantee overall. In summary we are able to analyse all of the following situations in the experiment: Respondent chooses the optimal choice in Round 1, and remains with this choice; Respondent chooses a suboptimal choice in Round 1, and switches to the optimal choice in Round 2; Respondent chooses a suboptimal choice in Round 1, and remains with this choice in round 2; Respondent chooses a suboptimal choice in Round 1 and improves on this decision in Round 2; and Respondent chooses a suboptimal choice in Round 1, and makes a worse decision in Round Product order did not materially alter respondent performance. 95

96 Illustration of choice experiment for mobile phones For illustration, below, we present examples of both textual and graphical formats, with each offer containing four features. The values presented in these figures are for illustrative purposes only. The actual figures used have been discussed in subsequent design documents included with the scripting file. Graphical form Round 1 In round 1, respondents are asked to choose between not buying a guarantee and buying a guarantee as outlined in Deal Pink. Respondents will be given a brief explanation of excess, and we incorporate i buttons in the displays. If respondents click on these buttons, they receive a brief explanation of the contract feature. For example, clicking on the i button for excess may display the following information: An excess is a flat fee that you pay towards the cost of repair or replacement of your phone, in case your phone breaks down and you make a successful claim based on your guarantee. For example, assume that you have bought a commercial guarantee, and the excess is 5. If your phone breaks down, you will pay 5 towards repair or replacement of your phone, and the guarantor pays the rest. Example question (for countries other than Sweden): Suppose that you have purchased a mobile phone for 250. Out of 200 people who bought this phone, 15 reported that it broke down in the first 2 years, and 30 reported that it broke down in the first 3 years. You are offered a commercial guarantee for a duration of 3 years, offering repair or replacement of your mobile phone in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your mobile phone, not accidental damage, loss or theft. Consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the mobile phone breaks down, those who are covered by the commercial guarantee may need to pay the excess, hardware fee and software fee, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the mobile phone, depending on when the breakdown occurs Please imagine you are offered the commercial guarantee shown in the following screen. Would you like to purchase it? Click on the i icon if you need an explanation of any of the features on the screen. 96

97 Figure 8: Guarantee choices for mobile phones in Round 1 (graphical display) Note: All offers are shown in national currency Round 2 In Round 2, respondents are asked to indicate whether they would like to stay with their choice in Round 1, or whether they would like to choose any of the alternative deals (Pink or Purple). Example question (for Sweden): Suppose that you have purchased a mobile phone for 250. Out of 200 people who bought this phone, 30 reported that it broke down in the first 3 years, and 40 reported that it broke down in the first 4 years. You are offered a commercial guarantee for a duration of 4 years, offering repair or replacement of your mobile phone in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your mobile phone, not accidental damage, loss or theft Consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the mobile phone breaks down, those who are covered by the commercial guarantee may need to pay the excess, hardware fee and software fee, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the mobile phone, depending on when the breakdown occurs Your current choice is shown below. Two new commercial guarantees have become available. Would you like to remain with your initial choice, or select one of the commercial guarantees shown below? 97

98 Figure 9: Guarantee choices for mobile phones in Round 2 (graphical display) respondent chose No Guarantee in Round 1 Note: All offers are shown in national currency Text form Round 1 In round 1, respondents are asked to choose between not buying a guarantee and buying a guarantee as outlined in Deal Pink. Example question (countries other than Sweden): Suppose that you have purchased a mobile phone for 250. Out of 200 people who bought this phone, 15 reported that it broke down in the first 2 years, and 30 reported that it broke down in the first 3 years. You are offered a commercial guarantee for a duration of 3 years, offering repair or replacement of your mobile phone in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your mobile phone, not accidental damage, loss or theft. Consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the mobile phone breaks down, those who are covered by the commercial guarantee may need to pay the excess, hardware fee and software fee, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the mobile phone, depending on when the breakdown occurs Please imagine you are offered the commercial guarantee shown in the following screen. Would you like to purchase it? Click on the i icon if you need an explanation of any of the features on the screen. 98

99 Figure 10: Guarantee choices for mobile phones in Round 1 (text display) Note: All offers are shown in national currency Round 2 In Round 2, respondents are asked whether they would like to stick with their selection in Round 1, or whether they would like to choose any of the alternative deals (Pink or Purple). Example question (Sweden): Suppose that you have purchased a mobile phone for 250. Out of 200 people who bought this phone, 30 reported that it broke down in the first 3 years, and 40 reported that it broke down in the first 4 years. You are offered a commercial guarantee for a duration of 4 years, offering repair or replacement of your mobile phone in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your mobile phone, not accidental damage, loss or theft Consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the mobile phone breaks down, those who are covered by the commercial guarantee may need to pay the excess, hardware fee and software fee, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the mobile phone, depending on when the breakdown occurs Your current choice is shown below. Two new guarantees have become available. Would you like to remain with your initial choice, or select one of the guarantees shown below? 99

100 Figure 11: Guarantee choices for mobile phones in Round 2 (text display) respondent chose Guarantee Pink in Round 1 Note: All offers are shown in national currency llustration of choice experiment for washing machines Graphical form Round 1 In round 1, respondents are asked to choose between not buying a guarantee and buying a guarantee as outlined in Guarantee Pink. Example question (countries other than Sweden): You have purchased a washing machine for 400. Out of 100 people who bought this machine, 3 reported that it broke down in the first 2 years, 5 that it broke down in the first 3 years, and 7 that it broke down in the first 5 years. You are offered a commercial guarantee, offering repair or replacement of your machine in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your machine, not accidental damage, loss or theft In this exercise, consumers who buy a commercial guarantee must pay the price of the guarantee up front. If the machine breaks down, those who are covered by the commercial guarantee may be required to pay the excess and home repair costs, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the machine, depending on when the breakdown occurs Please imagine that you are deciding whether to buy a commercial guarantee for your machine. Consider the choices shown below. Would you buy the commercial guarantee? 100

101 Figure 12: Guarantee choices for washing machines in Round 1 (graphical display) Note: All offers are shown in national currency Round 2 In Round 2, respondents are asked whether they would like to stick with their selection in Round 1, or whether they would like to choose any of the alternative deals (Purple or Orange). Example question (Sweden): Suppose that you have purchased a washing machine for 400. Out of 100 people who bought this product 5 found that it broke down in the first 3 years 6 found that it broke down in the first 4 years 7 reported that it broke down in the first 5 years. You are offered a commercial guarantee, offering repair or replacement of your machine in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your machine, not accidental damage, loss or theft. In this exercise, consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the machine breaks down, those who are covered by the commercial guarantee may be required to pay the excess and home repair costs, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the machine, depending on when the breakdown occurs The selection you just made is now your current choice this is shown below. Two new commercial guarantees are also available. Would you change to one of these new commercial guarantees, or stay with your current choice? 101

102 Figure 13: Guarantee choices for washing machines in Round 2 (graphical display) respondent chose Guarantee Pink in Round 1 Note: All offers are shown in national currency Text form Round 1 In round 1, respondents are asked to choose between not buying a guarantee and buying a guarantee as outlined in Deal Pink. Example question (countries other than Sweden): Suppose that you have purchased a mobile phone for 250. Out of 200 people who bought this phone, 15 reported that it broke down in the first 2 years, and 30 reported that it broke down in the first 3 years. You are offered a commercial guarantee for a duration of 3 years, offering repair or replacement of your mobile phone in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your mobile phone, not accidental damage, loss or theft. You are offered a commercial guarantee for a duration of 3 years. Consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the mobile phone breaks down, those who are covered by the commercial guarantee may need to pay the excess, hardware fee and software fee, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the mobile phone, depending on when the breakdown occurs If you buy it, you will not have to pay anything other than the price of the guarantee and any additional features you may choose to buy. If you do not buy the guarantee and your machine breaks down, you may lose the phone and have to buy a new one. Please imagine you are offered the commercial guarantee shown in the following screen. Would you like to purchase it? Click on the i icon if you need an explanation of any of the features on the screen. 102

103 Figure 14: Guarantee choices for washing machines in Round 1 (text display) Note: All offers are shown in national currency Round 2 In Round 2, respondents are asked whether they would like to stick with their selection in Round 1, or whether they would like to choose any of the alternative deals (Purple or Orange). Example question: Suppose that you have purchased a washing machine for 400. Out of 100 people who bought this product 5 found that it broke down in the first 3 years 6 found that it broke down in the first 4 years 7 reported that it broke down in the first 5 years You are offered a commercial guarantee, offering repair or replacement of your machine in case it breaks down. In this exercise, commercial guarantees cover only breakdown of your machine, not accidental damage, loss or theft. In this exercise, consumers who buy a commercial guarantee must pay the price of the commercial guarantee up front. If the machine breaks down, those who are covered by the commercial guarantee may be required to pay the excess and home repair costs, depending on when the breakdown occurs (more details will be provided by clicking on the i buttons on the following images) those who are not covered by the commercial guarantee (i.e. if they did not buy the commercial guarantee or the guarantee does not cover their situation) may lose the full value of the machine, depending on when the breakdown occurs The selection you just made is now your current choice this is shown below. Two new commercial guarantees are also available. Would you change to one of these new commercial guarantees, or stay with your current choice? 103

104 Figure 15: Guarantee choices for washing machines in Round 2 (text display) respondent chose Guarantee Purple in Round 1 Note: All offers are shown in national currency A6.5.3 Part B: Willingness to Pay Test This section discusses the design of the willingness to pay and willingness to accept experiments. Section 0 discusses the concepts of willingness to pay (WTP) and willingness to accept (WTA). Section 0 discusses the rationale behind inclusion of both approaches. The following section considers the different methods for estimating WTP and WTA using experiments, and the approach that we propose for this study. Section 0 describes the experiment setup. Examples of WTP questions follow in Sections 0 and 0. Willingness to pay (WTP) and Willingness to accept (WTA) There are two related concepts that can be used to measure consumers valuation of commercial guarantees: Willingness to pay (WTP): this frames the consumer s valuation of a commercial guarantee as a payment to ensure coverage against adverse impacts. o Example: You have bought a washing machine. What would you pay to ensure that if it breaks down, you get immediate repair and replacement? Willingness to accept (WTA): this frames the consumer s valuation of a commercial guarantee as compensation for the adverse event. o Example: You have bought a washing machine. What should you receive so that you are compensated if it breaks down? Inclusion of both WTA and WTP WTA can operate as the upper bound of valuation estimates. WTP can operate as the lower bound. Studies have shown that WTA estimates can be significantly higher than WTP (The Economist 114 and Kahneman, Knetsch and Thaler 115 ). The two measures differ because of the behavioural bias known as the endowment effect. The endowment effect is the result of loss aversion and reference dependence. 114 The Economist. (2010). Carrots dressed as sticks. The Economist, p Kahneman, D., Knetsch, J., & Thaler, R. (2009). Experimental Tests of the Endowment Effect and the Coase Theorem. In E. Khalil (Ed.), The New Behavioral Economics. Volume 3. Tastes for Endowment, Identity and the Emotions. Elgar Reference Collection. International Library of Critical Writings in Economics, vol (pp ). Cheltenham, U.K. and Northampton, Mass. 104

105 That is, people require more in compensation for losing a good (WTA) than they would be willing to pay for it (WTP), since possession of the good becomes their reference point and loss aversion means they need more compensation in order to accept losing it. Although it is possible to run both WTP and WTA experiments. WTP seems to be the more relevant for the commercial guarantee environment. This is because a commercial guarantee is a product that the consumer pays for when the primary product (the washing machine or mobile phone) is purchased. As such, the consumer is not previously endowed with the commercial guarantee. This means we may not want to introduce the endowment effect into the experiment as this is not the case in the real world market. Therefore, a WTP measure may be the more appropriate estimate. An additional matter is that of sample size. If we focus on WTP only, we effectively double our sample size. This is because when respondents are allocated to treatments, it is important to avoid WTP responses affecting WTA responses, and vice versa. Therefore, respondents should be allocated to either WTP or WTA experiments. If the study focuses on WTP, this splitting would not occur. It has been agreed with the Commission to include WTP only. Methodology In this section, we discuss our selection of methodology, as well as our reasons for this selection. Choice modelling and contingent valuation There are two major methodologies for eliciting WTP: Choice modelling: respondents make a series of choices using pre-defined settings. WTP is inferred from the choices made. o For example, respondents are asked to choose between paying x for breakdown cover for 3 years, and x+p for breakdown cover for 5 years. Contingent valuation: respondents are asked what they would pay for a specified change. o Contingent valuation questions can take various forms, as set out in Section Table 31. The two methodologies have their own advantages and disadvantages, as set out in the following table. 105

106 Table 31: Choice modelling and contingent valuation Method Description Advantages Disadvantages Choice modelling Respondents make a series of choices; WTP is inferred from the choice made Contingent valuation Respondents are asked directly how much they would pay for a specified change Useful for modelling choice dimensions: for example, the trade-off between breakdown cover and accident cover Provides WTP values for the good as a whole, with less complexity Simpler to design Simpler to understand for respondents Thus, less likely to have random response error Complex to answer Thus, more likely to have random response error (Accent; RAND Europe 116 ) Subject to biases depending on design. This means that designers should pay careful attention to the choice of method and design used (described in more detail in below.) We use contingent valuation for the current experiment. We recommend this over choice modelling for the following reasons: It is simpler for respondents to understand, therefore fewer random response errors. o Note also that respondents have 10 minutes in which to carry out: o WTP experiments, o Take it or leave it choice experiments, o Comprehension exercise, o Additional follow-up questions on their prior knowledge of legal guarantees and motivation for choices made within the experiment. It is suitable for the current question, since we are concerned with WTP for commercial guarantees as a whole. o Choice modelling is more complex, and is of particular use when estimating WTP for different dimensions of a commercial guarantee. For example, choice modelling would be useful when deriving WTP for the length of a commercial guarantee. However, deriving WTP for the good as a whole requires additional computations. o Contingent valuation methods provide WTP estimates for the good as whole, with less computation. Contingent valuation options Contingent valuation questions can take the following forms: Open-ended: in which respondents are asked what their WTP is. Bidding game: in which respondents are given offers to buy commercial guarantee contracts with ascending prices. WTP is derived from the maximum offer respondents accept. Payment card method: in which respondents are shown a scale of offers, and choose their WTP 116 Accent; RAND Europe. (2010). Review of stated preference and willingness to pay methods. Competition Commission. 106

107 Dichotomous choice: similar to the bidding game, respondents are shown offers which increase every time they accept. WTP is inferred from the highest offer respondents accept. o In double-bounded dichotomous choice experiments, if respondents do not accept the initial offer, they are shown a lower offer in the next round. These methods each have their advantages and disadvantages, as summarised in the following table. 107

108 Table 32: Contingent valuation methods Open-ended Bidding game Method Description Advantages Concerns Double-bounded Dichotomous choice Respondents are asked to state their WTP Respondents are asked whether they agree/disagree with offers. Offers increase with every agreement. WTP inferred from maximum offer accepted Respondents are asked whether they accept/ reject an offer. If respondents accept, they are shown a higher offer, and asked if they accept. If they reject, they are shown a lower offer. WTP is inferred from the maximum offer accepted Payment card method Respondents are shown the full scale of responses. WTP is inferred from the maximum amount they indicate on the card Simple design and execution Easy for respondents to understand Simple to design With appropriate design, more precise estimates of WTP Less subject to strategic responses than dichotomous choice method Lower sample size required than doublebounded dichotomous choice High likelihood of zeros Protest bids High clustering around round numbers ( 10, 20 etc.) (Pearce and Ozdemiroglu 117 ) WTP is influenced by: Initial offer (Bateman, et al. 118 ; Pearce and Ozdemiroglu) Scale of increase of offers Respondents may behave strategically. If they know that offers increase every time they accept, they may reject an offer even if they would otherwise accept (Accent; RAND Europe 119 ; Pearce and Ozdemiroglu) As with the bidding game, WTP is affected by the initial offer and scale of increase of offers Little information from each respondent; large sample size required (Bateman, et al.) Responses provide a range of estimates, not a point value (Accent; RAND Europe) Respondents may provide lower estimates than their true WTP (Accent; RAND Europe). Responses may be biased towards the centre of the range Responses depend on the scale of the card Responses provide a range of estimates, not a point value (Accent; RAND Europe) 117 Pearce, D., & Ozdemiroglu, E. (2002). Economics valuation with stated preference techniques. Rotherham: Department for Transport, Local Government and the Regions. 118 Bateman, I., Carson, R., Day, B., Hanemann, M., Hanley, N., Hett, T., et al. (2002). Economic valuation with stated preference techniques: A manual. Cheltenham: Edward Elgar. 119 Accent; RAND Europe. (2010). Review of stated preference and willingness to pay methods. Competition Commission. 108

109 Double-bounded dichotomous choice We use the double-bounded dichotomous choice method. In this method, respondents are shown an initial offer, and are asked if they accept or reject it. If they accept this offer, they are shown a higher offer and asked if they accept or reject it. If respondents reject the initial offer, they are shown a lower offer and asked if they accept or reject it. WTP is inferred from the highest offer accepted. We arrived at this choice by first narrowing down the options to the payment card method (in which respondents are shown a scale with a range of commercial guarantee prices), and dichotomous choice method. These are the recommended alternatives for contingent valuation experiments (Accent; RAND Europe 120 ). This is because they avoid the risk of non-response or clustering around round figures of open-ended questions, and can be designed to provide reasonably precise ranges of estimates of WTP. We recommend double-bounded dichotomous choice over the payment card method because of the following concern: the payment card method is affected by the range of offers shown, as well as the centre. This is because of a bias known as range bias, in which respondents answers are influenced by the scale of the offers they are shown. Empirical studies have shown that increasing the maximum offer from 100 to 1,000 can result in 30% higher estimates of WTP (Ternent and Tsuchiya 121 ). Studies have also shown that responses can be biased towards the centre of the range shown (Henderson and Dunn 122 ). This occurs when respondents are asked a question without a Yes/No answer, where they may not be sure of the answer themselves. When there is this kind of uncertainty, responses can be influenced by, or anchored to, the centre of the scale. In the case of dichotomous choice, outcomes are subject to starting point bias that is, respondents answers are influenced by, or anchored to, the first offer they see. Responses will be biased downwards (upwards) if the initial offer is at the lower (upper) end of the price scale. For instance, if a respondent were shown an initial offer of x, her WTP may be lower than if the first offer were 2x. This bias can be addressed by randomly allocating respondents to an initial offer taken from a distribution of commercial guarantee prices. For each of these groups, responses will be influenced by the starting price. However, by averaging out WTP responses across all respondents, WTP will be unbiased across the sample. The price distribution information will be collected through a targeted desk-based review. The distribution will be calibrated to as closely reflect real-world conditions as possible. In this way, biases will cancel each other out over the sample as a whole. Thus, responses on average are unbiased for the whole sample. However, this method of allocation requires a larger sample than with the payment card method 123. Moreover, because of the larger sample requirements, the number of treatments we can carry out is limited. We later discuss the experimental setup we propose. 120 Accent; RAND Europe. (2010). Review of stated preference and willingness to pay methods. Competition Commission. 121 Ternent, L., & Tsuchiya, A. (2011). A note on the expected biases in conventional iterative health state valuation protocols. The University of Sheffield HEDS Discussion Paper 122 Henderson, J. E., & Dunn, M. A. (2007). Investigating the potential of fee-based recreation on private lands in the Lower Mississippi River Delta. Southern Agricultural Economics Association Meetings 123 Centring bias can be addressed by constructing a distribution of prices, and randomly allocating respondents to payment scales with a centre drawn from this distribution. 109

110 Experiment setup The WTP experiments are designed to answer the following questions: How much are respondents willing to pay for a commercial guarantee? Is willingness to pay affected by the price of the primary product (washing machines or mobile phones), or the duration of the commercial guarantee? In this section, we describe the proposed experimental procedure. We first describe the allocation of respondents to treatments, then describe the derivation of WTP and provide examples of the experiment for both products. Allocation of respondents to treatments Before respondents begin the experiment, they are allocated to different treatment groups. The procedure is summarised below: First, respondents are split into high primary product price and low primary product price groups. This is done to examine the impact of the price for the primary product on WTP for commercial guarantees- that is, whether respondents have a higher willingness to pay for commercial guarantees for more expensive primary products. Next, respondents are split into long duration and short duration groups. This is done to examine the impact of commercial guarantee duration on WTP- that is, whether respondents have a higher willingness to pay for commercial guarantees when they are offered a longer duration of coverage. Next, respondents are randomly allocated to groups with initial offers drawn from a price distribution. This is done to address the bias caused by respondents anchoring to the first offer they see. The construction and interpretation of this distribution is described in more detail below. The following figure illustrates the sample split for a price distribution for four intervals (P1, P2, P3, P4). Figure 16: Sample splitting 110

111 Price distribution We construct a distribution of prices for breakdown cover, calibrated to reflect the data as closely as possible. This distribution will enable us to determine the following characteristics: Minimum market price for commercial guarantees for washing machines and mobile phones, as taken from our desk-based research; Minimum initial offer; Maximum market price for commercial guarantees for washing machines and mobile phones, as taken from our desk-based research; Maximum initial offer; Median price; and Intervals between offers. This in turn enables us to establish the number of initial offers in the distribution, and thus the number of groups to which we allocate respondents. In addition, these intervals enable us to construct intervals for WTP, depending on the respondents sequence of choices. This is described in more detail in the section below. We would, as far as possible, try to construct these intervals so that: Price-points of intervals are close to those observed in reality; Intervals represent meaningful statistical quantities. o For example, if there are 4 intervals, one option is for the lowest initial offer to be in the 20 th percentile (for example, 20% of prices lie below it); the second-lowest initial offer is in the 40 th percentile and the highest initial offer is in the 80 th percentile. o In the case of some products like mobile phones, we observe clustering of commercial guarantee prices- that is, prices are relatively spread out at the bottom end of the price distribution, but very close together towards the top end of the distribution. It is advisable for the starting prices of commercial guarantees to reflect this distribution. In this case, we may like to have initial offers close together at the bottom end of the distribution, and far apart at the top end of the top end of the distribution. The following tables present the price intervals used in the experiment for each product, in each country. In the willingness to pay test, local currency is used. However, purchasing parity standard is used so that willingness to pay measures are comparable across countries. 111

112 Table 33: Price intervals shown to respondents in willingness to pay: washing machines Country Primary Product Price Commercial guarantee duration Long (5 years) Short (2 years) P1 P2 P3 P4 P1 P2 P3 P4 CZ High: Initial price Kč9.520 Higher price Lower price Low: Kč5.360 Initial price Higher price Lower price FR High: Initial price Higher price Lower price Low: Initial price Higher price Lower price DE High: Initial price Higher price Lower price Low: Initial price Higher price Lower price IT High: 570 Initial price Higher price Lower price Low: 320 Initial price Higher price Lower price PL High: 1.230zł Initial price

113 Table 33: Price intervals shown to respondents in willingness to pay: washing machines Country Primary Product Price Commercial guarantee duration Long (5 years) Short (2 years) Higher price Lower price Low: 690zł Initial price Higher price Lower price RO High: 1.240lei Initial price Higher price Lower price Low: 700lei Initial price Higher price Lower price SE High: 6.580kr Initial price Higher price Lower price Low: 3.700kr Initial price Higher price Lower price UK High: 530 Initial price Higher price Lower price Low: 300 Initial price Higher price Lower price Note: These prices are presented as a one-off cost for the full duration of the commercial guarantee. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. 113

114 Table 34: Price intervals shown to respondents in willingness to pay: mobile phones Country Primary Product Price Commercial guarantee duration Long (3 years) Short (2 years) P1 P2 P3 P4 P1 P2 P3 P4 CZ High: Kč6.800 Initial price Higher price Lower price Low: Kč2.390 Initial price Higher price Lower price FR High: Initial price Higher price Lower price Low: Initial price Higher price Lower price DE High: Initial price Higher price Lower price Low: Initial price Higher price Lower price IT High: 410 Initial price Higher price Lower price Low: 140 Initial price Higher price Lower price PL High: 880zł Initial price Higher price Lower price Low: 310zł Initial price

115 Table 34: Price intervals shown to respondents in willingness to pay: mobile phones Country Primary Product Price Commercial guarantee duration Long (3 years) Short (2 years) Higher price Lower price RO High: 890lei Initial price Higher price Lower price Low: 310lei Initial price Higher price Lower price SE High: 4.700kr Initial price Higher price Lower price Low: 1.650kr Initial price Higher price Lower price UK High: 380 Initial price Higher price Lower price Low: 130 Initial price Higher price Lower price Note: These prices are presented as a one-off cost for the full duration of the commercial guarantee. The experiment is conducted for 8,027 respondents in CZ, FR, DE, IT, PL, RO, SE and the UK. 115

116 Illustration of WTP Intervals The following table illustrates the price distribution and offer intervals for a distribution with four combinations of initial offer, lower offer and higher offer, as illustrated below. Table 35: Price distribution Group Initial offer ( ) Lower offer ( ) Higher offer ( ) P1 P1 P1-x P2 P2 P2 P1 P3 P3 P3 P2 P4 P4 P4 P3 P4+x Respondents are randomly allocated to groups P1, P2, P3 or P4, and given two sets of Yes/No choices. In the case of WTP experiments, respondents are given an initial offer: If they accept, they are shown a higher offer and asked whether they accept or reject it. o If they then accept the higher offer, WTP is inferred as lying in the interval between the higher offer and the highest market price. o If they reject the higher offer, WTP is inferred to lie between the initial offer and the higher offer. If they reject the initial offer, they are shown a lower offer and asked whether they accept or reject it. o If they then accept the lower offer, WTP is inferred to lie between the lower offer and the initial offer. o If they reject the lower offer as well, WTP is inferred to lie between the lowest market price and the lower offer. The following figure illustrates the procedure and WTP intervals in this case.

117 Figure 17: WTP intervals If respondents reject both offers or if they accept both offers they will then be asked an open question requesting them to state what they would be willing-to-pay. Further, respondents are asked why they are willing-to-pay the price they state; and, if they indicated a price of zero (or that they would not buy a guarantee) they are asked why they are not willing-to-pay for a commercial guarantee. Illustration of WTP: Mobile phones Before beginning the experiment, respondents are randomly allocated to one of the following groups. The monthly prices are kept the same across duration treatments (monthly price is the same for the long duration treatments as for the short duration treatments ). However, respondents will see guarantee offers as total prices for the duration of the guarantee- for example, consider a respondent offered a guarantee in the 2 set, for a guarantee duration of 2 years. The price would be presented to her as 48 for a guarantee duration of 2 years.

118 Table 36:Price sets, mobile phones, breakdown cover (monthly) Initial offer ( ) Higher offer ( ) Lower offer ( ) Initial prices for commercial guarantees are drawn randomly from a distribution of market prices before showing them to respondents. Once respondents have been allocated to their price group, they are given two sets of Yes/No choices. Below we provide an example, using illustrative figures. The actual figures used have been discussed in subsequent design documents included with the scripting file. For example, if a respondent has been allocated to the 3 group, for a mobile phone costing 300, and a guarantee duration of 2 years, she would first be asked: Q1. You have purchased a mobile phone for 300. Would you be willing to pay a one-off payment 72, to be ensured free repair and replacement in case of breakdown, for a period of 2 years? Yes No If the respondent answers Yes to Q1, she is asked: Q1.1. And would you be prepared to pay a one-off payment of 84? Again assuming that the phone cost 300, and that this is for 2 years, to be ensured free repair and replacement in case of breakdown? Yes No If the respondent answered No to Q1, she is asked: Q1.2. And would you be prepared to pay a one-off payment of 48? Again assuming that the phone cost 300, that this is for 2 years, to be ensured free repair and replacement in case of breakdown? Yes No If the respondent answers No to both questions or Yes to both questions, she is then asked: Assume still that you have purchased a mobile phone for 300. What would you be willing to pay as a one-off payment to be ensured free repair and replacement in case of breakdown for 1 year? Please answer in numerals rather than words for example, 25 rather than Twenty-five.

119 Illustration of WTP: Washing Machines Before beginning the experiment, respondents are randomly allocated to one of the following groups. These prices are annualised, so as to keep price offers the same for short duration treatments, as for long duration treatments. However, as with the case of mobile phones, the prices are presented to respondents as one-off payments, covering the whole of the guarantee duration. Table 37: Price sets, washing machines, breakdown cover (annualised) Initial offer ( ) Higher offer ( ) Lower offer ( ) Initial prices for commercial guarantees are drawn randomly from a distribution of market prices before showing them to respondents. Once respondents have been allocated to their price group, they are given two sets of Yes/No choices. For example, if a respondent has been allocated to the 19 group, for a washing machine costing 500, for a guarantee duration of 3 years, she would first be asked: Q1. You have purchased a washing machine for 500. Would you be willing to pay a oneoff payment of 57, to be ensured free repair and replacement in case of breakdown in the first 3 years? Yes No If the respondent answers Yes to Q1, she is asked: Q2.1. And would you be prepared to pay a one-off payment of 63? Again, assuming that the machine cost 500, this is to be ensured free repair and replacement in case of breakdown in the first 3 years? Yes No If the respondent answered No to Q1, she is asked: Q2.2. And would you be prepared to pay 51? Again, assuming that the machine cost 500, this is to be ensured free repair and replacement in case of breakdown in the first 3 years? Yes No

120 If the respondent answers No to both questions or Yes to both questions, she is then asked: Assume still that you have purchased a washing machine for 500. What would you be willing to pay to be ensured free repair and replacement in case of breakdown in the first 3 years? Please answer in numerals, rather than words- for example, 200 rather than Two hundred. If the respondent provides a positive willingness-to-pay value in the experiment they are then asked the following question (note the position of the answer options are randomised across respondents): W4b_W You said that you would pay [amount indicated by respondent] to purchase a commercial guarantee covering a [mobile phone/washing machine] for a duration of [duration provided to respondent]. Which of the following reasons was the most important one for giving this answer? I think that my machine mobile phone is likely to break down I think that my machine mobile phone will be costly to repair Neither of these If on the other hand the respondent provided a value of zero or indicated they would not buy a guarantee then they are asked the following question (note the position of the answer options are randomised across respondents): W4a_MP/WM. You chose not to purchase a commercial guarantee for the [mobile phone/washing machine] in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was too low to make purchase of the commercial guarantee worthwhile The cost of repair or replacement was too low to make purchase of the commercial guarantee worthwhile I have purchased a commercial guarantee before and never used if I never purchase commercial guarantees Other Don t know A6.5.4 Part C: Comprehension Test Respondents will undertake a comprehension exercise that will test their ability to understand the conditions of a legal guarantee. Example comprehension exercise Respondents will first be shown one mock legal guarantee document and asked a series of questions. Please imagine you have just bought a new washing machine and the following guarantee was provided with the washing machine. Please read the guarantee and answer the questions that follow.

121 Figure 18: Mock manufacturer s guarantee A Q3. Does this guarantee cover damage to your appliance in the case of accident? Yes No Don t know Correct response: No

122 Q4. Repairs will be undertaken in the event of material or manufacturing defects, if reported within 24 months of the Date the fault was identified Date of purchase Date of delivery from the manufacturer to the retailer Don t know Correct response: Date of purchase Testing comprehension of burden of proof On the next screen the respondents will then be shown two guarantees side-by-side on their screen. These guarantees are presented below (guarantee A and B). They will then be asked a question which requires them to identify that the burden of proof period is different between the two guarantees. Figure 19: Mock legal guarantees for burden of proof test Q5. You purchase an article, and observe a defect 8 months after purchase. Under which guarantee would you need to prove to the seller that the defect is not owing to extraordinary or negligent use, but manufacturer and/or material fault? Guarantee A Guarantee B Don t know

123 Correct response: Guarantee A The following will be measured: Whether respondents select the correct answer; and The time taken to arrive at the response. We do not include a question to test respondents understanding of the legal guarantee period (24 months, except SE where the length is 3 years; and, in England, Wales and Northern Ireland consumers have up to 6 years to bring a claim, while in Scotland this period is 5 years.) within the experiment part as this is tested in Q35a of the consumer questionnaire. A6.5.5 Part D: Cognitive Ability Test Respondent characteristics In addition to the three experiments, respondents will be asked a range of sociodemographic variables that we include in the analysis of behaviour in the experiments. The following table set out, in more detail, the variables for which information is suggested to be collected. We indicate which variables will be collected in the consumer questionnaire and which will be collected on the experiment part. We then follow with a set of additional questions.

124 Table 38: Respondent characteristics Characteristics Covered already in consumer questionnaire? Motivation for inclusion Socio-demographic Characteristics Gender Y (Q. D2) Standard demographic Age Y (Q D1) Standard demographic Level of education Y (Q D3) Standard demographic Employment status Y (Q D5) Standard demographic Financial situation Y (Q D7) Standard demographic Urbanisation and geographic region Y (Q D4) Standard demographic Internet use Y (Q D6) Low internet use could lead to situations where consumers have difficulty searching and comparing products. Low internet use is also a variable that is often used to indicate potential vulnerability (building on Special Eurobarometer ). Risk taking Y (Q R1) Respondents that do not like to take risks may tend to purchase commercial guarantees more often, and at greater than expected value Cognitive ability Y (Q COG1) Respondents may vary in their ability to calculate expected probability Question on risk taking: R1. How do you see yourself? Are you generally a person who is Not at all willing to take risks Not very willing to take risks Fairly willing to take risks Very willing to take risks Don t know Prior estimation of probability of breakdown In the choice experiment, respondents are informed of the probability of breakdown. They may have prior estimations of the likelihood of breakdown. In the following questions, we elicit respondents estimation of the likelihood of breakdown. 124 European Comisision (2011). Special Eurobarometer 342: Consumer Empowerment. Eurostat and the Directorate-General for Health and Consumers (DG SANCO)

125 Mobile phones: In this experiment, you were given a figure for the likelihood that your machine would break down. Before you began this experiment, what did you think the likelihood was that your machine would break down in the first 2 years? Choose a single response. Between 1 and 5 times out of a 100 Between 10 and 15 times out of a 100 Between 15 and 20 times out of a 100 Between 20 and 25 times out of a 100 Between 25 and 30 times out of a 100 More than 30 times out of a 100 Washing machines: In this experiment, you were given a figure for the likelihood that your machine would break down. Before you began this experiment, what did you think the likelihood was that your machine would break down in the first 2 years? Choose a single response. Less than 1 time out of a 100 Between 1 and 5 times out of a 100 Between 5 and 10 times out of a 100 Between 10 and 15 times out of a 100 Between 15 and 20 times out of a 100 More than 20 times out of a 100 Motivation for choices made in the experiment The following questions investigate the reasons for respondent choices made during the experiment. To review, the following figure represents the sequence of possible choices that respondents can make in the take it or leave it experiment.

126 Figure 20: Respondent choices For respondents who chose no commercial guarantee in the take-it or leave-it experiment, the following is asked: Mobile phones: You chose not to purchase a commercial guarantee for the mobile phone in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was too low to make purchase of the commercial guarantee worthwhile The cost of repair or replacement was too low to make purchase of the commercial guarantee worthwhile I have purchased a commercial guarantee before and never used it I never purchase commercial guarantees Other Don t know Washing machines: You chose not to purchase a commercial guarantee for the washing machine in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was too low to make purchase of the commercial guarantee worthwhile The cost of repair or replacement was too low to make purchase of the commercial guarantee worthwhile I have purchased a commercial guarantee before and never used if I never purchase commercial guarantees Other Don t know

127 For respondents who chose a commercial guarantee in the take-it or leave-it experiment, ask the following: Mobile phones: You chose to purchase a commercial guarantee for the mobile phone in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was high so the purchase of the commercial guarantee was worthwhile The cost of repair or replacement was high so the purchase of the commercial guarantee was worthwhile I have purchased a commercial guarantee before and used it I often purchase commercial guarantees Other Don t know For respondents who chose a commercial guarantee in the take-it or leave-it experiment, ask the following: Mobile phones: You chose to purchase a commercial guarantee for the mobile phone in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was high so the purchase of the commercial guarantee was worthwhile The cost of repair or replacement was high so the purchase of the commercial guarantee was worthwhile I have purchased a commercial guarantee before and used it I often purchase commercial guarantees Other Don t know Washing machines: You chose to purchase a commercial guarantee for the washing machine in the previous task. Can you tell us why you made this choice? Choose all that apply. The chance of breakdown was high so the purchase of the commercial guarantee was worthwhile The cost of repair or replacement was high so the purchase of the commercial guarantee was worthwhile I have purchased a commercial guarantee before and used it I often purchase commercial guarantees Other Don t know For both products: On a scale of 1 to 4 (with 1 being Extremely dissatisfied and 4 being Extremely Satisfied ), how satisfied are you with your experiment choices? 1 Extremely Dissatisfied 2 Dissatisfied 3 Satisfied

128 4 Extremely Satisfied (If respondents chose 1 or 2 ): Can you tell us why you were not satisfied with your choice? There were no guarantees on offer that had a fair price It was difficult to compare between options and choose the best one I could not understand the choices I was asked to make (If respondents chose 3 or 4 ): Can you tell us why you were satisfied with your choice? The commercial guarantee I purchased had a fair price It was easy to see which commercial guarantees had a fair price It was easy to see whether any commercial guarantees had a fair price It was easy to compare between options and choose the best one I could easily understand the choices I was asked to make Expectation of depreciated value of primary product In the choice experiment, respondents are informed that if they are not covered by a guarantee, the cost to them if their primary product breaks down is equal to the price of the primary product. This is a simplifying step, so that consumers can make the calculation necessary to make the optimal choice. In real life, consumers may have different expectations of the cost of breakdown of their primary product. With the following question, we investigate these expectations. Imagine that you have bought a product like a television. Suppose that it breaks down 2 years after you have purchased it. Which of these statements do you think is true? I would expect to pay more than I paid two years ago for the same level of satisfaction, because I would need to buy a newer model, and newer models cost more I would expect to pay less than I paid two years ago for the same level of satisfaction, because I would need to buy an older model, and older models should cost less Cognitive Ability Test Respondents will be asked some questions measuring cognitive ability. Example: financial literacy exercise Respondents are given the following information for a hypothetical product: Please consider the following. Imagine you have bought a new refrigerator. You are told that the chance that it breaks down in the first 5 years is 5% and if it breaks down it will cost 1,000 to replace it. COG1. What is the average value of the cost of breakdown if it breaks down in the first 5 years?

129 500 1,000 Don t know Correct response: A6.5.6 Changes made to the experiment after the pilot Choice Experiment The pilot was used to examine a number of concerns (raised during bilateral conversations with DG JUST in February 2015). These were whether the choice experiment was too complex, and whether the choice experiment should be recalibrated for the UK to reflect the fact that consumers in the UK have at least 5 years (6 years in England and Wales, and 5 in Scotland) to bring a claim in the event of goods being found faulty. In the following section we summarise the use of the pilot to examine these concerns, the findings of the pilot and what changes (if any) were made as suggested by the pilot and in consultation with DG JUST. Complexity of choice experiment A concern with the choice experiment is that it is too complex, and that we may not be able to isolate the impact of treatments on respondent performance, since respondents may find the experiment too difficult. The pilot helped us to examine whether this is the case, using the following metric: whether the fraction of respondents answering correctly is greater or lower than the rate of random guessing (25%). This is because if the choice experiment is too complex, respondents may guess randomly. Therefore if the rate of correct guesses is no higher than the rate of random guessing, the experiment should be made simpler. In the pilot, responses have an average accuracy rate of over 35% (for mobile phones) and over 40% (for washing machines). While sample sizes are too small to say anything definitive, this suggests a better-than-random accuracy rate. Thus, it was concluded that the experiment was not too complex, conceptually. However, in consultation with DG JUST, it was agreed that differences between the first and second-best options in the choice experiment would be enlarged and made more salient. This is done so that those respondents who conceptually understand the calculation they are asked to make, and make the calculation, will choose the optimal, rather than second-best, option, and we retain our ability to examine the impact of information and information presentation treatments on respondent performance in the choice experiment. Duration of legal guarantee for the UK A concern was raised about the duration of the legal guarantee in the UK. In all experimental countries, the length of the legal guarantee is 2 years (except for Sweden, where it is 3 years). However, in the UK, the 1979 Sale of Goods and Services Act indicates that consumers have 6 years in England (5 in Scotland) to bring a claim for faulty goods. In this case, consumers in the UK may make choices in the choice experiment, as well as WTP test, based on this unobservable understanding. We used the pilot to check whether consumers were aware of this provision in the UK, and whether it determines their choices, as follows: using the fraction of respondents selecting No Guarantee in the choice experiment (for both products), and indicating that the length of legal guarantee in their country is 5 years or more in their response to Consumer Survey 125 This question is calibrated to national currencies.

130 Question 35a. If this fraction is high, it suggests that many respondents in the UK are aware of the provision of the Sale of Goods and Services Act, and use this knowledge in the choice experiment. Very few respondents in the pilot (3 out of 101) indicated that they believed that the legal guarantee lasted more than 5 years. These three all chose not to purchase commercial guarantees. However, none of them noted that this was because they believed that the commercial guarantees did not last as long as legal guarantees. While it is difficult to generalise from a small sample, the pilot does not indicate that a large number of UK respondents know about the longer period of contractual liability in the UK, or use that knowledge to influence their choices in the experiment. Therefore, in consultation with DG JUST, it was concluded that the experiment would continue without recalibrating for the UK. Willingness to Pay test The coverage of the commercial guarantee in the WTP experiment is the same as the coverage of the legal guarantee. It was agreed with DG JUST that post pilot this would be reassessed to determine if we keep this design feature or if we extend the coverage of the commercial guarantee. This question has arisen because in the WTP experiment the short duration commercial guarantee is 2 years, is precisely the length of the legal guarantee. This creates a situation where a knowledgeable consumer should not be willing-to-pay anything for the commercial guarantee. One benefit of this design, however, is that it may reveal information that consumers are buying commercial guarantees they do not need (as raised during bilateral conversations in February 2015). In the pilot, respondents, on average, are willing to pay a one-off payment of between 4 (for mobile phones) and 7 (for washing machines) for commercial guarantees covering them against breakdown for 2 years. Keeping this design feature for main-stage will enable us to examine such factors as the impact of primary product price, commercial guarantee duration and respondent characteristics on the willingness to pay for commercial guarantees that respondents do not need. It was therefore decided in consultation with DG JUST to keep the coverage as is in the WTP experiment.

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