Consumer Labelling on Trial at the WTO: Misunderstanding the Behavioural Law and Economics of Consumer Information
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Description
It is axiomatic that the efficiency of the market as a mechanism for the maximization of consumer preferences depends on the ability of consumers to be informed about those qualities and characteristics of products that matter in terms of the satisfaction of their preferences. Yet information itself is costly. Sellers may well have relevant information about products that they may not see it as in their interests to disclose to consumers (the problem of information asymmetry). Consumers are often concerned about characteristics of products that they could not directly evaluate or at the time of purchase, even if they were willing and able to invest time and effort in doing. Where sellers voluntarily disclose information about products, consumers may not trust their claims, except where they can be independently verified and where the making of false or misleading claims can be effectively sanctioned by legal penalties. It is thus not surprising that governments have sought to improve the functioning of consumer markets through regulating the disclosure of information about goods and services. The regulation of the labelling of consumer products is one such example. One form of such regulation is the monitoring and enforcement of claims made in voluntary labelling, prescribing what a producer must be able to prove in order to attach a given voluntary label to its product. While conforming to such regulations, including verification requirements, may be costly for sellers, those sellers whose products have characteristics that consumers desire may actually prefer regulation to non-regulation if a large enough group of consumers would not trust the label absent the role of government in verification and enforcement. Governments may also make it mandatory to disclose certain information on the label of a product. There can be several reasons for mandatory labelling. One reason is that the government is not only concerned to reduce the information costs of consumers but to influence consumer behaviour in a certain direction that is considered to be socially beneficial. Take the case of energy efficiency labelling: where consumers are enabled through such labelling to choose energy efficient products they experience a private benefit either in terms of lower energy costs and/or personal satisfaction that they are contributing to a reduction in the carbon emissions that result from the production of energy; but the reduction of those carbon emissions produces an additional social benefit in contributing to climate mitigation (assuming that the social cost of emissions has not already been internalized in the pricing of the energy). Without government intervention information may well be undersupplied, since consumers’ willingness to pay for the information will be based only on the private benefit. Another reason for mandatory labelling is that individual firms may be reluctant to invest in labelling if they do not have assurance that other firms will follow suit: the evidence is that consumers are much more likely to respond to labelling if it is highly visible and widespread in the product category in question. Empirical evidence suggests that one of the strongest determinants of whether labelling has a significant impact on consumer behaviour is the degree of government involvement, with an especially high level of effectiveness where the government mandates the use of the label. These results are not surprising: where only a few of the products in a category are labelled consumers will face higher search costs in identifying those products, finding retail outlets at which they are sold, etc. Consumers may not invest information in the first place in understanding the label, the claim it represents, and the likelihood that the representations are truthful and accurate if the label is not widely available and does not apply to an attractive selection of products. Of course government intervention is not the only possible response here: collective action by all or most firms in an industry is an alternative, and does sometimes occur. This last concern relates to a final consideration. Under voluntary labelling with government monitoring and certification, firms whose products have attributes that consumers value positively pay the cost of labelling (even if they do not pay the costs of the monitoring and certification). Firms selling products that do not have these attributes have an incentive not to label the product as not possessing the attributes that consumers’ desire. They gain by not having to pay label-ling costs as well as from the possibility that in the absence of a label some consumers will wrongly assume that the product has the positive characteristics in question and thus purchase it, whereas they would not if fully informed. Mandatory disclosure, which imposes in principle equal costs on the sellers of products that have and do not have the attributes desired by large groups of consumers, can remove the market distortion induced by imposing the cost of information on the sellers of the more desired product, in the presence of information asymmetries.
Source Publication
Reflections on the Constitutionalisation of International Economic Law: Liber Amicorum for Ernst-Ulrich Petersmann
Source Editors/Authors
Marise Cremona, Peter Hilpold, Nikos Lavranos, Stefan Staiger Schneider, Andreas R. Ziegler
Publication Date
2014
Recommended Citation
Howse, Robert L., "Consumer Labelling on Trial at the WTO: Misunderstanding the Behavioural Law and Economics of Consumer Information" (2014). Faculty Chapters. 845.
https://gretchen.law.nyu.edu/fac-chapt/845
