Product Literacy and the Economics of Consumer Protection Policy

By Pappalardo, Janis K. | The Journal of Consumer Affairs, Summer 2012 | Go to article overview

Product Literacy and the Economics of Consumer Protection Policy


Pappalardo, Janis K., The Journal of Consumer Affairs


I suffer from overoptimism bias. I know this, yet I accepted the invitation to write a commentary on product literacy and consumer protection for this special issue. After devoting over twenty-five years to consumer protection research and law enforcement at the Federal Trade Commission (FTC), the topic was in my wheelhouse. Surely, I could meet a deadline that seemed reasonably far away. But I also suffer from hyperbolic discounting, so I procrastinated. When I finally sat down in earnest to write this essay, panic set in, because I realized that the concept of product literacy is not well defined. Now what? Relying on my overoptimism, I decided to create my own definition.

This exercise forced me to confront vexing questions about competing theories of consumer behavior and their implications for consumer policy. Consumer policy development depends fundamentally on the policy maker's view of consumer behavior. Policies will differ depending upon whether consumer decisions are viewed as rational, irrational, or somewhere in between. Yet, theories regarding rational consumer choice are in a state of flux, largely due to the growth and popularization of behavioral economics. Popular books such as Nudge have placed behavioral economics front and center in consumer policy circles (Thaler and Sunstein 2008). It is now fashionable inside the Washington DC Beltway to point to behavioral research suggesting that consumers do not maximize wealth, are overly optimistic, or procrastinate due to hyperbolic discounting, as proof that policies based on rational consumer models are insufficient to protect consumers (Kobayashi et al. 2012). This conclusion is then frequently used to argue that new policies should be implemented to protect people from their irrational selves. For example, some argue that mandating information disclosures from sellers is not enough--because consumers do not pay enough attention to them--and that disclosure regimes should be supplemented with or replaced by more prescriptive remedies, such as product bans or product preapproval mechanisms (Ben-Shahar and Schneider 2011; Posner and Weyl 2012).

Although the future of consumer policy will be shaped by prevailing views of consumer rationality, there is surprisingly little serious debate among scholars from different disciplines or subdisciplines about the evidence for and against different models of consumer decision making. There are notable exceptions, but even when meaningful debate occurs it is often clouded by confusion over the precise meaning of key terms. What does it really mean for a consumer to be rational, or irrational, or reasonable? Discussion in behavioral circles tends to focus on whether people behave rationally, in the sense that people maximize an unconstrained or partially constrained utility problem. Evidence that people do not behave according to simple utility maximization models is often seen as evidence that people are not rational. What I find perplexing is why the standard for rationality in behavioral discussions tends to be based on utility maximization or wealth maximization constrained only by limited financial resources. I find this perplexing because the economics of consumer behavior, as taught in graduate school over thirty years ago, was based on a much more realistic model of consumer choice. When I explain this at conferences I encounter surprise by practitioners and scholars who are fluent in behavioral economics. Consumer economists have long understood that consumers face real time constraints, wealth constraints, and household production constraints, including decision-making and information-processing constraints.

In this essay, I define product literacy and discuss where the concept fits within the law and economics of consumer protection. In so doing, I attempt to clarify what it means to be a rational consumer vs. a reasonable consumer vs. an irrational consumer. These different views of consumer behavior matter, because they can lead to different policies with different implications for consumer choice and consumer welfare. …

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