The Antitrust/consumer Protection Paradox: Two Policies at War with Each Other

Wright, Joshua D., The Yale Law Journal

ESSAY CONTENTS

INTRODUCTION

I. CONSUMER LAW AND ITS INSTITUTIONS
     A. Consumer Protection Law
     B. Antitrust Law

II. THE ANTITRUST/CONSUMER PROTECTION PARADOX
     A. Example 1: Entry and the Introduction of New Products
     B. Example 2: Above-Cost Price Discounting
     C. Example 3: Product Bundling

III. THE PERSISTENCE OF THE PARADOX: A COMPARATIVE INSTITUTIONAL
     ANALYSIS
     A. The Economic Institutions of Consumer Law: Price Theory and
        Behavioral Economics
     B. The Legal Institutions of Consumer Law: Common Law and the CFPB
     C. The Political Institutions of Consumer Law: The Last Hope for
        Convergence?

CONCLUSION

INTRODUCTION

The intellectual soul of American consumer law is up for grabs as a battle emerges between its two pillars--conventional consumer protection law and antitrust law. The former focuses on ameliorating the deleterious effects of market failures associated with consumers' imperfect or incomplete information; the latter provides the institutional framework for protecting consumers from losses associated with the creation and acquisition of monopoly power. As both share the common goal of protecting consumer welfare, it is unsurprising that legal scholars, economists, and regulators envision a fully integrated "consumer law"--a term I use hereafter to refer jointly to antitrust and consumer protection.

The potential complementarities between antitrust and consumer protection are well known. (1) Both consumer law institutions seek to maximize consumer welfare, with antitrust policy focusing on market failures associated with the creation of market power and consumer protection emphasizing instances in which, despite ample competition, consumer welfare is threatened by information asymmetries and deception. (2) A simple price-theoretic, rational choice model of complementary operation of antitrust and consumer protection institutions might therefore envision consumer protection institutions allocating resources aimed toward improving disclosures, filling information gaps, and protecting against fraud and deception, with antitrust limited to preventing the unlawful creation or acquisition of market power and failures of the competitive process. While the consumer welfare paradigm would discipline both consumer law institutions under this complementary view, lines would clearly be drawn between them so as to minimize conflict. (3) Indeed, the global trend is toward integration of consumer law institutions. (4) Despite these substantial economic and legal complementarities, the Dodd-Frank Wall Street Reform and Consumer Protection Act portends a deep rift in the intellectual infrastructure of consumer law that threatens the development of both bodies of law, as well as consumer welfare and economic growth. This Feature identifies the intellectual and institutional origins of that rift and describes the emerging paradox it has created: a body of consumer law at war with itself.

Dodd-Frank heralded a revolution in consumer protection law and enforcement. It created the Consumer Financial Protection Bureau (CFPB) and granted it unprecedented regulatory powers in the consumer law context, including the exclusive rulemaking and primary enforcement authority over consumer financial protection, (5) while divesting consumer financial protection functions from the Federal Trade Commission (FTC) and other federal regulators. (6) In addition to the authority to prohibit unfair or deceptive practices in consumer financial product markets, (7) a statutory grant of power otherwise identical to that granted to the FTC, (8) the CFPB is charged with eliminating "abusive" practices (9) in the consumer financial services business and ensuring that consumer disclosures are "fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service." (10) Dodd-Frank also attempts to insulate the CFPB from interference by the political branches by lodging the new Bureau in the Federal Reserve, (11) giving it a budget that lies outside the appropriations process, (12) and providing the Director of the CFPB with a term appointment of five years subject to removal only for cause. (13)

What is most important about Dodd-Frank and consumer protection, however, is that it represents the arrival of behavioral law and economics as the intellectual centerpiece of the current administration's approach. Behavioral law and economics, as advocated by Professors Bar-Gill and Warren in an article laying out the blueprint for a new agency, (14) played a significant role in the creation of the CFPB. Behavioral law and economics is built upon the foundational assumption that consumers make predictable and systematically irrational decisions, and, indeed, that individual choice is not a reliable predictor of individual economic welfare; (15) this observation in turn has inspired both commentators and legislatures to propose various restrictions on consumer choice. (16) Behaviorists broadly contend that consumers systematically make choices that are both to their detriment and unrepresentative of their true preferences, and much of the behaviorist literature dedicates itself to establishing one or more of these biases in a specific context.

A critical component of the CFPB's mission, representative of this new vision of consumer protection, is to improve consumer decisionmaking by altering the basic design of consumer credit products, adding disclosure requirements, reducing consumers' choices, and instituting default rules favoring products approved by the given legislative agency. Notably, if this component of the CFPB's mission merely involved improving disclosures to ensure consumers are able to appropriately assess the risks of consumer financial products, its impact would be relatively modest. However, the behavioral approach to consumer law rejects revealed preference and with it the core economic link between consumer choice and individual welfare. Revealed preference in economics is the principle that allows economists to recover information about consumer preferences, and hence utility, from actual choice behavior. (17) Application of revealed preference requires an assumption that the consumer's preferences are stable over the relevant time period, but when that assumption is satisfied, it provides a powerful tool for extracting policy-relevant information about consumer preferences. Revealed preference does not imply that individual choices will lead to the socially optimal outcome or guarantee the absence of market failure; it simply states that among the choices available to the individual, the selected bundle best satisfies consumer preferences.

While I describe the CFPB's behaviorist intellectual foundation as rejecting the notion of revealed preference, it is important to understand that this does not merely mean that the CFPB rejects consumer sovereignty. Nor does price theory merely embrace consumer sovereignty. A brief background in the intellectual underpinnings of modern market regulation highlights the distinction between the behavioral approach to regulation and the standard microeconomic approach.

The standard economic theory of regulation predicates governmental intervention upon a demonstrable and correctable market failure. (18) A market failure occurs when functioning markets fail to realize full gains from trade through efficient production. (19) A broad swath of regulations, many of which outright prohibit certain products or reduce consumer sovereignty drastically, embraces this standard economic model. For example, consider the cases of exploding toasters and toys tainted with dangerous levels of lead. In either case, standard economic models of market failure associated with informational asymmetries may justify regulation to correct market failure. (20) Current regulations to combat monopolies, information asymmetries, and externalities draw upon this standard economic model. Environmental restrictions seek to force firms that are inefficiently overproducing to instead internalize pollution costs imposed upon third parties. (21) Industry-wide disclosure mandates on products ranging from medicine to finance prevent firms from inefficiently overproducing in reliance on the reasonable but unjustified expectations of lesser-informed consumers.

Whether or not these regulations achieve their stated goals remains beyond the scope of this piece, but it suffices to say that each of these regulations--and the standard economic regulatory framework associated with them--assumes standard, stable, rational consumer preferences. In other words, the standard framework maintains (even when restricting consumer choice) that the consumer's choice behavior reflects sincerely held preferences. Notwithstanding the revealed-preference principle, because of the market failures described above, social welfare may not be maximized. Whereas the standard economic model attacks some market failure preventing private exchanges from maximizing rationally held consumer preferences, behaviorists advance a combination of theories that may be summarized as "imperfect optimization" (22) : consumers do not maximize their own welfare, even absent traditional market failures. (23)

Both economic approaches contemplate situations in which restricting individual choice improves both private and social welfare. The key distinction between behavioral and rational choice approaches to consumer protection is therefore not differences in respect afforded to consumer sovereignty per se, but rather the conceptual link between individual choice and inferences of economic welfare. Whereas price theory embraces the conventional economic understanding of revealed preference-an economic agent choosing apples over oranges is made better off by his decision--the behaviorist approach requires a comparison of the agent's choice with the selection that the agent would have made according to his "true" preferences, which would only be revealed if he were free from cognitive biases.

The behaviorists' rejection of revealed preference highlights the uniqueness of the CFPB's approach to consumer protection. Many regulatory agencies, including the Food and Drug Administration and the Consumer Product Safety Commission, often exercise their consumer protection enforcement powers in a manner that reduces consumer sovereignty.24However, as explained above, it is not necessary to abandon revealed preference, or conventional price theory, to justify choice-reducing (but consumer-welfare- or efficiency-maximizing) regulatory interventions designed to solve conventional market failures. What distinguishes the behavioral approach to consumer protection is the rejection of revealed preference--that is, abandoning the notion that consumer choices reveal something useful about the consumer's welfare. The behavioral approach must substitute the information provided by operation of the revealed preference principle. The most unique (and challenging) feature of the behavioral approach generally, and certainly in the consumer protection context specifically, is that it requires identification of "true" preferences, which commonly must be identified by the regulator, in order to generate the information needed to understand how policies impacting consumer choices relate to consumer welfare. (25) The new consumer protection policy contemplated by Dodd-Frank combines the insights of behavioral economics and its fundamental assumptions about individually irrational behavior and welfare with the centralization--and incentives--of a powerful administrative agency. While some have recognized the monumental changes that Dodd-Frank portends for consumer protection law, its significant implications for antitrust law have not been fully appreciated. (26) By way of contrast with the near-sudden legislative creation of the new behavioral consumer protection law, the evolution of the Sherman Antitrust Act has been a tale of measured integration of neoclassical microeconomic analysis into the vague contours of the Sherman Act. Antitrust law has gradually incorporated both theoretical and empirical insights from antitrust economics under the Supreme Court's auspices and through the case-by-case development of a common law of antitrust. There is no serious debate that the institutional integration of economics into antitrust law through the courts has been a boon for consumers.

Robert Bork's The Antitrust Paradox famously exposed the then-incoherent, unstable, and unpredictable body of antitrust law pursuing multiple (sometimes conflicting) goals, none with any success. (27) The integration of economics shifted antitrust law from an intellectually embarrassing and socially costly body of law to a broad "consumer welfare prescription." (28) Indeed, antitrust law has traveled an institutional journey that has resulted in its deep commitment not merely to economic analysis generally but specifically to rational choice microeconomics.

The antitrust/consumer protection paradox represents a critical crossroads for consumer law. While the intellectual and philosophical underpinnings of rational choice and behavioral economics are important components of the rift in consumer law, they do not explain its emergence. Rather, the key to understanding the emerging chasm between antitrust and consumer protection lies in comparative institutional analysis. The primacy of judicial decisionmaking and private litigation in the development of antitrust is conducive to a set of economic tools that narrows the possible set of outcomes, reduces uncertainty, and improves the quality of decisions. (29) An important feature of behavioral economics is that it broadens rather than reduces uncertainty about possible equilibrium outcomes from a given transaction, rule, or business practice. Thus, it is unsurprising that behavioral economics has not gained traction in the courts, especially with respect to antitrust. (30) On the other hand, behavioral economics' lack of predictability makes it malleable and easier to manipulate than its neoclassical relative, which are attractive features for achieving the political ends sought by an administrative agency.

The emerging policy equilibrium is both unstable and untenable in the long run. It is not only wildly inefficient but also causes firms attempting to avoid liability from one pillar of consumer law to increase their exposure under another. There can be no peaceful equilibrium coexistence of the "new" consumer protection and the "old" antitrust. There are only two general possibilities for the ultimate resolution of this paradox: (1) the successful hostile takeover of "old" antitrust by a "new" behavioral version consistent with the "new" consumer protection or (2) the failure of behavioral consumer protection institutions and reversion to neoclassical consumer law. Over the short and perhaps even medium term, the divergence is likely to persist. Indeed, resolution of the internal intellectual conflict within antitrust evolved over decades, not years. The outcome, in terms of both the nature and timing of such a resolution, depends most critically upon a comparative analysis of antitrust and consumer protection institutions.

In Part I of this Feature, I describe the birth of behavioral consumer protection, beginning with its intellectual origins and leading to the passage of Dodd-Frank. I explain how this novel approach to consumer protection assumes a weak conception of consumer choice and rejects the link between revealed preference and economic welfare. I also describe existing antitrust law and institutions, which are built upon a foundation of rational choice economics and a strong conception of consumer choice and revealed preference.

In Part II, I identify the emerging antitrust/consumer protection paradox. The trajectory of the new consumer protection places consumer law at war with itself in a very practical sense. Antitrust law encourages behavior that consumer protection condemns, and vice versa. This intellectual rift poses serious consequences for how the law conceives of both consumer protection as well as consumers themselves.

In Part III, I explain the emergence of the paradox as a function of the legal, economic, and political institutions shaping both branches of consumer law. More specifically, I describe the differing assumptions animating neoclassical economics and behavioral economics and how these assumptions shape antitrust and the new consumer protection law, respectively. These differences set the stage for a comparative institutional analysis of the courts and agencies that play the central roles in determining how and to what extent economic assumptions are built into consumer law and policy.

I. CONSUMER LAW AND ITS INSTITUTIONS

A. Consumer Protection Law

Two bodies of law comprise the modern law of consumer welfare: consumer protection and antitrust. Modern consumer protection law originates in the common law and its perceived failings. Redress for common consumer grievances--such as the inaccurate description of a product or the dishonoring of a warranty--lay in suits for breach of contract, fraud, or fraudulent misrepresentation. (31) Both tort and contract remedies presented problems, however. Tort theories of recovery imposed "intent to deceive" and causation requirements, while contract theories required privity between buyer and seller, (32) which became more uncommon in the increasingly mobile (1960) s American economy. Judicial remedies often could prove economically futile as the cost of a suit typically could overwhelm whatever damages the consumer could demonstrate. (33)

The Federal Trade Commission Act (FTCA) created the Federal Trade Commission in (2914). (34) The FTCA established the Federal Trade Commission and empowered it to regulate "[u]nfair methods of competition." (35) The Commission initially focused on antitrust and other trade regulation violations, hinting at the two complementary purposes that the modern FTC has come to embody. (36) After an early U.S. Supreme Court case ruling that the FTC lacked the power to prosecute consumer harms absent competitive injury, (37) Congress amended the FTCA to prohibit "unfair or deceptive acts or practices in... commerce," (38) statutory language that remains the foundation of modern federal consumer protection law. (39) Congress consciously left this proscription open-ended, delegating both definition and enforcement of these prohibitions to the FTC in the pursuit of maximizing consumer welfare. (40)

Yet, dogged failures in both federal consumer protection law as well as ineffective FTC enforcement provoked state-driven consumer protection law. (41) The FTCA lacked a private right of action enabling individuals to recover losses sustained as a result of harmful practices. (42) While the FTC enjoyed the power to enforce the FTCA by pursuing injunctions against unfair practices, by the 1960s, the FTC was widely viewed as a paradigm of regulatory capture and was characterized as ineffectual and beholden to flights of fancy. (43) States responded by passing a variety of state consumer protection acts. (44) The earliest acts prohibited a specific list of actions deemed or expected to be harmful to consumer welfare, focusing on "consumer fraud." (45) Subsequent acts tended to track the FTCA's language, leading to the moniker "little FTC Act" for these state laws, (46) many of which expressly deferred to federal interpretations of analogous provisions in consumer protection law. (47) Some of these "little FTC Acts" failed to require deference to the FTC's interpretation of the FTCA, and many enabled private rights of action, thereby vastly broadening the reach of state consumer protection law. (48) They further provided that state attorneys general could seek injunctions against acts in violation of the consumer protection laws while "private attorneys general" prosecuted private complaints. (49) State laws removed many of the tort barriers and provided for attorneys' fees to a prevailing plaintiff so as to make vindicating meritorious consumer protection claims an economically viable enterprise. (50) In short, these laws gave consumers broad redress for welfare-harming practices.

A review of both these federal and state consumer protection laws reveals a focus on "consumer welfare"--even as the definition of that term evolved. At the federal level, following a Supreme Court case limiting the FTC's authority to directly regulate consumer harms, Congress passed the Wheeler-Lea Act to allow the FTC to address "unfair or deceptive acts or practices in commerce." (51) The courts have interpreted "deceptive" as something less stringent than the requirements of common law fraud, in keeping with the FTC's consumer-centered mission: a practice that merely had the tendency or capacity to deceive has sufficed to implicate the FTC's authority under deceptive practices. (52) Similarly, a 1964 FTC statement describing "unfairness" emphasized whether a practice proved "immoral, unethical, oppressive, or unscrupulous" as well as if it "cause[d] substantial injury to consumers." (53) A 1980 federal reformulation of the FTC's unfairness analysis took consumer welfare concerns yet further, determining unfairness based upon whether a practice inflicted a substantial injury, taking into consideration whether the practice offered countervailing benefits and whether consumers themselves could have most easily avoided the complained-of injury. (54) Congress codified this definition of unfairness into the FTCA in 1994. (55)

The evolution of state consumer protection law also reflects this consumer-welfare driven focus. The Revised Uniform Deceptive Trade Practices Act, one of the first model state consumer protection acts, focused on preventing consumer harm arising from the "misleading trade identification or false or deceptive advertising." (56) The Unfair Trade Practices and Consumer Protection Law similarly focused on acts that created a "likelihood of confusion or misunderstanding." (57) Straightforward economic logic underlies both rationales: in dynamic markets, consumers' revealed preferences best demonstrate consumer desires, and consumer welfare is increased when consumers are better able to satisfy their desires through transparent and accurate transactions. The traditional thrust of consumer protection, therefore, was in preserving consumers' reasonable expectations in transacting while reducing both economic and legal barriers to suit imposed by the common law regime.

One branch of economics increasingly questions this link, however, leading some legal academics to question the policy implications of modern consumer protection law's reliance upon revealed preferences. The 1990s and 2000s heralded a dramatic rise in the behavioral law and economics literature, largely centered on cataloguing, describing, and explaining various "biases" in individual decisionmaking, such as optimism bias, hyperbolic discounting, and framing effects. (58) Whereas only 14 legal articles in the early 1990s referenced "behavioral economics," 103 articles did so in the late 1990s, and 993 articles did so from 2005 through 2009. (59)

Behavioral legal economists share a presumption: the link between consumers' revealed preferences and actual consumer welfare is far weaker, and holds in far fewer situations, than rational choice economic presumptions--and …

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Publication information: Article title: The Antitrust/consumer Protection Paradox: Two Policies at War with Each Other. Contributors: Wright, Joshua D. - Author. Journal title: The Yale Law Journal. Volume: 121. Issue: 8 Publication date: June 2012. Page number: 2216+. © 2009 Yale University, School of Law. COPYRIGHT 2012 Gale Group.

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