Food markets and consumer protection

Characteristics of a free market

Buyers and sellers, free entry to the market, everyone sells the same thing, everyone has relevant information about the product, all costs are borne by the producer

Is there need for state intervention in a free market?

No intervention, because fruit, veg, meat comes straight from the supplier and is sold to consumer. Only intervention is selling license and hygiene standards

What are the results of a perfect free market?

Efficient distribution of resources, optimal market conditions for business, high level of competition, low prices for consumers

Assumptions for an effective free market for optimal operation

Perfect information, equality of bargaining power, low barriers to entry, compliance with regulation, low enforcement costs and consumers are rational and sovereign

What is the equality of bargaining power?

Consumers may not have an individual impact on products price (e.g. in a supermarket), but consumers as a whole impact the price of food

What is cost benefit analysis?

Allows policy makers to think through all the consequences of a policy, therefore avoiding unnecessary expensive rules

What is involved in a cost benefit analysis?

The costs of the policy are outweighed by the benefits, actual compliance costa may be measured by industry, difficult to measure intangibles - consumer confidence, peace of mind, security and safety

What types of market failure exist?

Lack of competition (dictated price), product differentiation (lack of product homogeneity), information gaps between buyer and seller, third party effects (pollution)

Information, consumers and the market

It’s not necessary for all consumers to be well informed in order for markets to function competitively.

A few well informed consumers may have the effect of making a market competitive.

Also uninformed consumers will not necessarily lead to uncompetitive markets in itself. Important thing is to look at the effect on the market rather than the level of knowledge of the consumer.

What is imperfect consumer information?

Common rationale for consumer protection (product labelling, notice about risk)

Information failure for consumers

A rational for consumer protection measures

Examples of information failures

Potential misallocation of resources, observable failures (price), less easily observed (product quality)

False and misleading claims

False claims offer no benefit and should not be tolerated, this causes loss of confidence in the market. This is most important in relation to expensive purchases made once (e.g. cars or saffron, wagyu steak)

Hidden costs

Experience of a product or service will not reveal defects or harm until later, if at all (e.g. salt, fat, sugar)

‘Bundled’ services

Services which involve diagnosis and treatment, how do consumers judge the quality of the diagnosis and the treatment after (e.g. car repairs)

Post purchase costs

Consumers face difficulty in estimating post purchase running, servicing and repair costs

Consumer complaints

Potential guide to markets most in need of intervention

Artificia; product differentiation

Where similar products are distinguished from each other to create a demand for one over the other, this is problematic in oligopolistic markets, consumers are given the impression that a product identical to others has some unique quality

Psychological insights

•Individuals use easy to access and vivid information e.g. point of sale rather than web site

•Form in which information is displayed will influence choice e.g. annual rather than monthly savings of changing gas supplier

•Reliance on personal experience and small samples as opposed to statistical data on reliability e.g. car reliability

Unequal bargaining power

Aims to put consumers on a more equal footing with business, this assumes the consumer or buyer is weaker - unfair terms legislation

Equity or fairness rationales

Market intervention not just on pure economic grounds but for redistribution of wealth or social goals; protect environment, promote health

Paternalism

•Government makes decisions on behalf of the consumer. It will override individual’s preferences and substitute own judgement

•Controversial – assumption that government knows best

•Consumers cannot evaluate information or they will act irrationally

•Risk of physical injury or major economic loss