State Regulations and E-Commerce: The Case for Internet Casket Sales in Oklahoma*
Sutter, Daniel, Journal of Private Enterprise
Death and taxes are the only two things which are inevitable in life. Although taxes fall naturally in the domain of economics, economists have paid scant attention to the death care industry, despite extensive regulation of the industry by the states. The potential exploitation of grieving family members provides the rationale for regulation of the industry, yet substantial anecdotal evidence of consumers' overpaying for funeral services under regulation abounds. Such allegations motivated the Federal Trade Commission to issue the Funeral Rule in 1984 to encourage price competition in the industry.
Caskets represent the largest single component of funeral costs. Funeral homes have traditionally sold caskets bundled with funeral services, but independent casket retailers have proliferated in the past decade. And with the emergence of e-commerce in the past decade, retailers now sell caskets via the Internet. As of 2002, ten states allowed only licensed funeral directors to sell caskets, preventing the entry of independent casket retailers in these states. Although the majority of policy attention regarding e-commerce has focused on taxation and the Internet (Goolsbee, 2001), e-commerce offers the prospect of undermining many anti-competitive state regulations (Mallinger, 2001).
I examine the effect of casket retailing on consumer welfare. I consider the extension of the rationale of protecting grieving consumers for funeral industry regulation to casket retailers. I contend that this offers an empty argument for consumer protection, and conclude that the entry of independent casket retailers is likely to yield substantial consumer benefits. I then examine evidence from the casket market in Oklahoma, a state which currently does not allow independent casket retailers. The Oklahoma market features high markups for caskets as well as considerable price dispersion. State regulation currently affords consumers little protection, so consumers, and even grieving consumers, would likely benefit from competition.
Protecting grieving consumers
I will first consider the protection of the grief-stricken consumer as a rationale for regulation of the funeral industry generally. I then consider the applicability of this argument to licensing casket sellers specifically.
Economics assumes that consumers in the bulk of their market activities are rational and self-interested. Consumers normally look out for their best interest as well as they can given the cost of acquiring information. Specifically economics assumes that consumers will purchase a homogeneous product from the seller offering the lowest price and will engage in rational search activity to find a good deal. Many people purchase funeral products and services immediately following the death of a loved one and due to emotional distress do not behave according to standard consumer theory. Such at-need consumers may emotionally be unable to engage in market search activity at this time. A grief-stricken consumer with little market information is likely to purchase all funeral products and services at one funeral home, often a home used previously by the family. Consequently the grief-stricken consumer is vulnerable to manipulation or exploitation by an unscrupulous supplier. A grief-stricken consumer might over pay for a funeral, since she is unaware of lower priced funeral homes in the market or due to misrepresentation of the legal requirements regarding funerals or the protective capability of expensive caskets. I take as given in this paper that protecting such vulnerable consumers is a worthy goal even though overpayment strictly speaking is a wealth transfer.
The case for regulation of the funeral industry turns on the effectiveness of market and regulatory mechanisms in protecting griefstricken consumers. The supply of funeral services is similar to the supply of expert services; consumers in each case possess particularly limited information and tend to rely on the advice of sellers in making purchases. …