Consumer Theories of Harm

An Economic Approach to Consumer Law Enforcement and Policy Making

Paolo Siciliani, Christine Riefa, Harriet Gamper

• Publisher: Hart Publishing
• Year: 2019
• ISBN:
  9781509916870
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto per la tutela dei consumatori

It has long been thought that fairness in European Consumer Law would be achieved by relying on information as a remedy and expecting the average consumer to keep businesses in check by voting with their feet. This monograph argues that the way consumer law operates today promises a lot but does not deliver enough. It struggles to avoid harm being caused to consumers and it struggles to repair the harm after the event. To achieve fairness, solutions need to be found elsewhere. Consumer Theories of Harm offers an alternative model to assess where and how consumer detriment may occur and solutions to prevent it. It shows that a more confident use of economic theory will allow practitioners to demonstrate how a poor standard of professional diligence lies at the heart of consumer harm. The book provides both theoretical and practical examples of how to combine existing law with economic theory to improve case outcomes. The book shows how public enforcers can move beyond the dominant transparency paradigm to an approach where firms have a positive duty to treat consumers fairly and shape their commercial offers in a way that prevents consumers from making mistakes. Over time, this 'fairness-by-design' approach will emerge as the only acceptable way to compete.

1

Introduction

I.The Search for Fairness

This book is about the search for fairness. Fairness is defined in the Cambridge Dictionary as the quality of treating people equally or in a way that is right or reasonable. In the Oxford Dictionary, fairness is the impartial and just treatment or behaviour without favouritism or discrimination. Fairness is a term normally associated with justice. It is also at the core of consumer law.

Consumer law is about the search for fairness in the protection of consumers throughout their interactions with businesses. For many years, it has been thought that fairness would be achieved by relying on information as a remedy and expecting the average consumer to ensure that businesses are kept in check. But it is our position that the way consumer law operates today promises a lot but does not deliver enough. It struggles to avoid harm being caused to consumers and it struggles to repair the harm after the event. To achieve fairness, solutions need to be found elsewhere. To date, those put forward have not worked properly. Worse, they have in some instances created perverse situations, where fairness is assessed more on procedural than substantive grounds.

Relying on consumer theories of harm (CToHs) to achieve fairness in business-to-consumer relationships feeds into two mainstream arguments: the need to rethink consumer law¹ and improve upon the neoclassical economic model on the one hand, and the development of a Better Regulation Agenda,² seeking to streamline legislation, on the other. Efforts are underway at both the European and national levels to ensure that the adoption of laws does not simply increase red tape but yields balanced and proportionate results.

Consumer theories of harm provide an alternative model that uses economics to guide policy responses and enforcement intervention. Using economics in the application of consumer law yields many benefits. It can be used to make consumer law more effective and help bypass the limitations currently inherent in the legal framework itself and the enforcement mechanisms of consumer and competition law. Besides this, the application of the four theories of harm developed in chapter five will provide a blueprint for the detection of practices that cause detriment, even if the law does not necessarily come to regulate them. As a result, CToHs can act as a ‘call to action’.

Any practices that fall within one of the four theories can be considered unfair and the cause of detriment. As a result, they would require attention. This may be either from the legislator, because the current legal system does not yet have the tools to protect consumers, or via the prioritisation of enforcement by regulatory bodies. In the former case, using the CToHs would help adopt legislation that is justified on economic grounds and help bolster the impact assessment that is normally conducted at proposal stage as part of the Better Regulation Agenda.³ In this latter case, the application of the theories of harm and the use of the economic principles that lie within them will help enforcers build more convincing cases. It is our view that many recent cases where enforcers have seen disappointing results may have unfolded differently if they had been analysed using the model we provide.⁴

Overall, and perhaps beyond the remit of this book, CToHs can offer a solution to the general lack of trust in markets exhibited by consumers. The biggest social dividend to be gained from the application of CToHs may be that the formulation of a duty to trade fairly for traders (as developed in chapter seven), supported by an economic rationale, would force a holistic rethink rather than smaller corrections around the edges, which are often sector-specific. CToHs stand firmly for the defence of a more social approach to consumer protection. They advocate the adoption of a more prescriptive standard of conduct for traders, but they do so whilst still embracing mainstream tools and rationale.

Before entering the crux of the matter, in this introduction we reflect on the origins of theories of harm and demonstrate that using theories of harm in consumer law, whilst novel, is only a natural evolution. Finally, we show how harnessing the use of economics in consumer law will bring with it many improvements.

II.Origins of Theories of Harm in Competition Law

Theories of harm have been used in a variety of fields of law as a way to conceptualise and consider the harm one suffers as the result of a practice. They can be traced in tort law,⁵ trademark law⁶ and competition law. To date, however, they have not been used in the application of consumer law.

Theories of harm, as we intend to use them in the consumer sphere, find their roots in competition law. There, they have developed, over the last 15 years or so, as a way to establish a rigorous standard of proof, which is seen to have improved competition law enforcement through the adoption of a more economic approach.⁷

A theory of harm in this context is an economic framework of conditions and incentives proving that not only competitors, but also, ultimately, consumers will suffer detriment if the disputed conduct is allowed to either go ahead or continue.

For example, a theory of harm in competition law requires that a demonstration be made of the way in which a restrictive agreement might distort competition to the detriment of consumers or how a proposed merger may result in higher prices and/or lower quality if allowed to proceed. To make such a demonstration, it is essential to build a case for what would have happened if the agreement did not exist. This is what competition lawyers call the ‘counterfactual’.⁸

Theories of harm started to develop after a number of cases where the decisions of the European Commission were quashed on appeal⁹ by the Court of First Instance (now the General Court). Around the turn of the millennium, under the leadership of Competition Commissioner Mario Monti,¹⁰ the European Commission shifted its approach towards considering not only the ability firms had to act anticompetitively, but also their incentive for doing so, by relying on robust economic theoretical insights.

In practical terms, the shift towards a more economic approach was aimed at reforming the prevailing formalistic approach, whereby certain practices were held to be per se illegal merely on the basis that the alleged conduct conformed to a particular ‘form’, rather than on the basis of its likely effect on competition and, ultimately, consumer welfare.¹¹ Nowadays, a ‘form’-based approach is still prevalent for so-called ‘hardcore’ cartel infringements such as price fixing, where per se illegality is fully justified on the basis of both theoretical analysis and past experience, leaving no room for doubt that these practices are highly detrimental.

However, with respect to other types of practices, the way enforcement unfolded started shifting¹² towards an ‘effects’-based economic approach, because there are often perfectly plausible and legitimate rationales underpinning a firm’s motivations to adopt particular behaviours. This is predominantly the case with respect to so-called vertical restraints, such as when a manufacturer and a retail distributor agree on exclusively dealing with each other to the exclusion of competitors. Exclusive agreements of this kind are motivated by the mutual desire to develop a partnership that can improve efficiency, although it necessitates undertaking irrecoverable investments (such as training sales staff on the technical specification of a new product line so that they can offer advice that is valued by clients). At the same time, exclusive agreements make the parties vulnerable to each other’s potential opportunism, given that the investment has no alternative use.

Enforcement against this type of practice should be based on a cogent theory of harm that reduces the risk of making a costly false conviction that, as a result, could deter firms from entering into beneficial agreements. A finding of infringement requires establishing that the anticompetitive effects are likely to be stronger than any potential pro-competitive effect. To this end, the use of economic theory allows the enforcer to develop propositions as to what firms may be capable and willing to do, given the constraints posed by the foreseeable reactions of competitors, customers and other relevant economic agents, such as suppliers and potential new entrants. These theoretical propositions must, of course, be consistent with the facts of the case. Ultimately, it must be argued that the alleged conduct would be detrimental to consumers because of a combination of higher prices, lower quantity and poorer quality (which can also encompass a variety of products and future improvements driven by innovation).

Therefore, under EU competition law, a more economic approach under the modernisation agenda had the effect of restricting the scope of what was considered an infringement.¹³ It put the onus on enforcement authorities to produce coherent theories of harm to articulate why an alleged practice would harm consumers by causing a reduction in their surplus.¹⁴

This approach, focused on welfare, is often portrayed in contrast to the so-called ordoliberal approach whereby competition law is an instrument for the preservation of the competitive structure of the market, rather than being exclusively concerned with consumer welfare and, thus, the protection of consumers from exploitation. Under ordoliberalism, competition rules are not designed only or primarily to protect the immediate interest of consumers, but to protect the structure of the market and thus competition as such (as an institution), so that consumers also benefit indirectly.¹⁵ Therefore, under the ordoliberal tradition, there is wider scope for intervention.¹⁶

In the Intel case,¹⁷ the European Commission adopted a more economic approach for the first time. The case concerned an allegation that the dominant firm foreclosed its only rival by granting retroactive loyalty rebates to key computer manufacturers and retailers in order to maintain its position as exclusive supplier. In its Intel decision, the Commission devoted some 150 pages to the economic analysis of the ‘as efficient competitor’ test. Under this test, competition law would be breached if a competitor with the same costs as the defendant would have to set below-cost prices in order to entice the targeted customers to switch at least part of their purchases.¹⁸ However, the Commission concluded that this was only one possible way to demonstrate the capability to foreclose and that it was not a requirement for finding an abuse. The General Court agreed with this interpretation, sticking with the formal approach¹⁹ and reinstating the old formalistic case law under which the Commission is not required to demonstrate that the alleged conduct is likely to foreclose a hypothetical equally efficient rival and therefore be detrimental to consumers.²⁰ However, the CJEU annulled the judgment by holding that the General Court was wrong to dismiss the defendant’s criticisms of the Commission’s economic analysis regarding the likely foreclosure of an equally efficient competitor.²¹ It instructed the General Court to look again, this time considering all of the ‘applicant’s arguments seeking to call into question the validity of the Commission’s findings concerning the foreclosure capability of the rebate concerned’.²²

This decision is seen by many as a vindication of the more economic approach²³ in competition law enforcement, although the practical significance of the judgment is debated.²⁴ Regardless, the embrace of economic analysis in competition law has become mainstream.

III.Using Theories of Harm in Consumer Law – A Natural Evolution

If the improvement the use of stricter scrutiny brings to competition law enforcement is obvious, it may be less clear, at this stage, how the development of theories of harm could benefit consumers and the enforcement of consumer law. Ironically, theories of harm in competition law rest on demonstrating that detriment to competitors will, in turn, translate into detriment to consumers. They are therefore focused on consumer welfare. Yet, while beneficial to consumers, at least in principle, theories of harm are not a concept consumer lawyers are normally familiar wit...