7 June 2016

Consumer protection in the digital age: has innovation displaced regulation?


“Many people want the government to protect the consumer, while a much more urgent problem is to protect the consumer from the government”,

Milton Friedman said. And it is truer than ever today, since the digital economy and its rules don’t seem to run at the same speed. As a result, many governments around the world – and especially in Europe – are having a hard time upholding before the 21st century consumer the need for endless authorisation procedures, stifling regulatory demands of federal agencies, obscure laws on product liability, taxi’s monopolistic driving licenses, notarial records, et cetera.

The justification for all such regulation usually concerns consumer ignorance. Crucial information about products and services within the market may indeed be ignored or misunderstood by the economic actors participating in it. And since trust among consumers and producers is essential for the economy to flourish, an assurance of quality and safety provided by the government is often viewed as a tool for economic growth and development. Regulation, in this regard, is deemed to be potentially helpful in identifying good suppliers and safe products, as well as in preventing frauds and rip-offs.

Until very recently, the case for a government intervention designed to mitigate the market failures generated by the fact that the latter would not be able or willing to provide information about given products and services was even shared by the most stubborn free-marketers.

In the past, various counterarguments have challenged the need for government regulation to ensure consumer protection. However, the greatest dare to it has undoubtedly been triggered by the digital revolution that is taking place in recent years. Internet has proven to be capable to connect people in a common platform on which to share opinions, desires and experiences, making the common knowledge thus created inevitably more precise and complete than any government agency or certification.

Internet has greatly expanded the market for goods and services, while reducing the barriers to entry and many limits to innovation, thus solving problems that regulation has aimed to solving for decades, without success (think of the impact of car sharing on pollution). As regards, specifically, the protection of consumers, the Internet contains a quantity of information on any good or service that was hard even only to conceive before its advent. Asymmetric information – often denounced as one of the main reasons underpinning the need for market regulation, has mainly become a bad memory: today’s consumers not only have access to powerful tools for analysis and comparison of goods and services, but transaction costs normally associated with them have also been drastically reduced.

Today’s digital economy shows that top-down government regulation is often made unnecessary by several forms of private governance which turn out to be as effective as actual laws, but significantly less lengthy, expensive, or invasive. In these innovative systems, it is already possible to see the ‘end’ of the concerns that had led to the increasing centralization of consumer protection in the hands of the government. Increasingly, consumers protect themselves by themselves, thanks to the “invisible hand” made possible by Internet. The fundamental criticism of Arrow – that information producers do not have a sufficient return on investment in the generation and dissemination of information to the public – finds in the Internet a tool capable to actually challenge the foundations on which it stands.

There are many reasons to believe that the law can and should still make up the market and its inefficiencies, especially as regards the protection of the weakest. However, it is equally a duty to understand that many of the structural foundations on which regulation is based – at least with regard to consumer protection – seem to confirm the intuitions by Friedman: that while a private company that makes a big mistake would probably be forced to leave the market by the market itself, a public body would be likely to get a greater budget, and that it is highly peculiar that who presses on legislatures for imposing or strengthening licensing systems are invariably the representatives of the professions in question, and not the consumers.

Giacomo Lev Mannheimer is a Fellow at the Istituto Bruno Leoni.