Consumer Law, Coursework Example

Introduction

The existing economic theory and taxonomic framework, which identifies consumers as ‘average,’ ‘vulnerable,’ ‘informed,’ or ‘confident,’ is a valuable tool for regulating consumer behavior and protecting consumer interests.[1] This paradigm makes the assumption that consumers’ degrees of resource access, knowledge, and expertise will determine how well-equipped they are to make wise financial decisions.[2] By using this framework, regulators can identify and protect those most vulnerable and least informed, thus ensuring that all consumers are treated fairly and equitably. This framework has been used to inform and shape policy in various areas, such as consumer protection, financial regulation, and competition law.[3] It has also been used to assess and evaluate existing regulatory initiatives’ effectiveness and identify areas where additional rules or interventions may be needed. In addition, this framework has been used to inform the design and implementation of interventions designed to improve consumer welfare. It is predicated on the idea that people have varying degrees of information, skills, and access to resources, as well as varying degrees of capability to make wise financial decisions. As such, it is critical to explore how this taxonomy is helpful for regulation, considering various factors such as consumer protection, market efficiency, and competition. It will also discuss the potential limitations of the existing economic theory and taxonomy regarding regulation. Ultimately, this essay will conclude that while the current economic theory and taxonomy can provide a valuable framework for regulation, certain limitations and areas for improvement should be considered when using this taxonomy in regulatory contexts.

Background

The economic theory and taxonomic framework are helpful for regulators in understanding the complexity of consumer markets. This framework has been developed over the past few decades to provide a more comprehensive view of consumer behavior and help inform the design of regulatory measures and consumer protection policies. The premise that consumers are typically intelligent, informed, and motivated to act in their paramount benefits underlies the notion of the “average” consumer.[4] This concept has been used to inform the design of many regulatory measures, such as consumer protection policies and product disclosure requirements. Regulators can better establish policies that give corporations the necessary incentives to operate in customers’ best interests by knowing how consumers make decisions.[5]

The ‘vulnerable’ consumer conception is predicated on the notion some clients may be vulnerable to manipulation or unfair practices because they are misinformed or financial resources.[6] This concept has been used to inform the design of consumer protection policies, such as mandatory education programs and enhanced disclosure requirements.. Regulators can better tailor their rules to ensure that all clients are appropriately protected by knowing the risks that vulnerable customers face. The premise of the “informed” customer concept is that some consumers may be better equipped to weigh the risks and rewards of their choices because they may have access to more information and resources than the average consumer.[7] This concept has been used to inform the design of product disclosure requirements, such as providing detailed information regarding the item or service. By understanding the needs of informed consumers, regulators can better ensure that all clients have admittance to the information required to make cognizant decisions. Lastly, the notion of a “confident” customer is predicated on the notion that some buyers may have more substantial financial resources and expertise than the ordinary buyer and may be better equipped to evaluate risks and rewards from investing in assets.[8] It has been used to inform the design of financial services regulation, such as restrictions on investment advice and product disclosure requirements. By understanding the needs of confident consumers, regulators can better ensure that all investors are adequately protected.[9]

The extent of Usefulness for Regulation

Consumer Protection

As mentioned earlier, this taxonomy is a valuable tool for regulating consumer protection by enabling regulators to tailor the regulations to the specific needs of a particular type of consumer. It provides a practical framework for determining the level of protection required for a particular consumer and how best to achieve that protection. The average consumer is unaware of the purchased product or service and may not know the potential risks or pitfalls. This consumer needs essential protection from unscrupulous practices and is most likely to benefit from simple regulations, such as clear disclosure of potential risks and costs associated with a purchase. For example, the Consumer Rights Act 2015 provides a framework of rights and remedies for average consumers, including the right to be informed of important information such as the terms and conditions of sale.[10]

The vulnerable consumer is likelier to be taken advantage of due to age, lack of comprehension, or lack of resources.[11] This type of consumer needs additional protection from unfair practices, such as those that could lead to poor financial decisions or those that could lead to exploitation or abuse. For example, the Financial Services and Markets Act provides a framework of protection for clients, comprising of the liberty to clear and appropriate advice and be protected from mis-selling.[12] The informed consumer is knowledgeable about the item being bought and aware of the potential risks and pitfalls related to the purchase. The customer requires safety, such as full disclosure of potential risks and costs associated with an investment and participate in informed decision-making. For instance the Consumer Protection from Unfair Trading Regulations 2008 provides a background of safeguard for informed customers, including offering clear and accurate data about the purchase.[13]

Customers who are aware about the products or services they are acquiring frequently have confidence in their ability to make informed judgments about purchases. This category of customers need the highest level of protection, including defense against unfair or dishonest corporate practices and the opportunity to use the whole spectrum of commodities and merchandise provided. For instance, the Unfair Terms in Consumer Contracts Regulations offer protection for consumers, including the liberty to be provided with precise data on the merchandise and the liberty to a fair transaction.[14]

Market Efficiency

Market efficiency is essential in determining the usefulness of the existing economic theory and taxonomic framework for regulation. It is described as the degree to which retail prices accurately represent all information that is accessible.[15] When a market is efficient, the prices of goods and services accurately reflect all the information of the market participants and supply and demand dynamics. When markets are efficient, they are less vulnerable to manipulation and market abuse, as all information is considered in price settings.[16] For example, regulators may utilize the theory and taxonomy to identify the average consumers and establish guidelines to protect them from exploitation. More so, regulators may require informed consumers of any new market developments or potential risks associated with a particular investment. They can also create rules and regulations that protect these consumers from being taken advantage of by more knowledgeable market participants. For example, regulators may require confident consumers to be informed of any potential risks associated with a particular investment or may need them to be informed of any new developments in the market.

Regulations designed for the average consumer should focus on providing essential protection, such as ensuring that information is disclosed clearly and concisely and that appropriate safeguards are in place to prevent unscrupulous practices.[17] For example, a regulation could require companies to provide clear explanations of product features and their associated costs and to provide clear answers about how the company’s services work. For the vulnerable consumer, regulations should focus on providing additional protection, such as requiring companies to disclose additional information about their products and services and providing education and resources to help the consumer understand the product or service.[18] Regulations designed for the informed and confident consumer should focus on providing additional protections to ensure that the consumer can make sound economic decisions.

Competition

Generally, the phase of rivalry in a market can be an essential factor to cogitate when evaluating the efficiency of regulatory frameworks based on this consumer taxonomy; where there is less competition, consumer protection laws may be more critical.[19] In competitive markets, consumer protection laws may be less necessary as consumers can compare prices and services and make informed decisions based on their preferences.[20] For example, in a competitive market, consumer choice may be driven primarily by price and quality rather than consumer protection.[21] In such an environment, consumer protection laws may be less necessary as consumers can more easily identify the best deals and services for their needs. In contrast, consumer protection laws may be more essential in markets where competition is limited. For example, in markets where a few large firms dominate, consumer protection may be necessary to protect vulnerable customers from unfair practices, such as excessive prices and hidden fees.[22]

In such markets, the taxonomy based on ‘average,’ ‘vulnerable,’ ‘informed,’ or ‘confident’ consumers may be more advantageous for regulation as it allows supervisors to recognize the most vulnerable customers, who may be unable to make informed choices due to lack of rivalry. Further, in markets where competition is limited, and consumer choice is lacking, consumer protection laws may be more necessary to prevent firms from exploiting vulnerable customers. For instance, in marketplaces with limited competitors, businesses could be inclined to hike prices or charge susceptible clients hidden costs since they are not able to compare options. In such markets, the taxonomy can help regulators identify the most vulnerable customers and ensure they are not taken advantage of.

Potential Limitations

Numerous potential limitations may affect regulation when using this framework. First, this framework may be too simplistic to describe the range of consumer behavior accurately.[23] The four consumer categories are general and might be unable to reflect the specifics of various consumer kinds. For example, the category of ‘vulnerable’ consumers is too general. It may not accurately capture the needs of consumers who are elderly, have a disability, or are financially disadvantaged. In addition, the categories of ‘informed’ and ‘confident’ consumers may not adequately capture the needs of consumers who may be familiar with one product or service but lack knowledge about other products and services. Second, the framework does not account for the complexity of consumer behavior. Consumers’ needs and preferences may be affected by various factors, including their income levels, access to information, and risk aversion.[24] However, this framework does not consider these factors, which could lead to an incomplete or inaccurate characterization of consumer behavior.

Third, the framework might not be able to account for the variations among consumers across various nations or locations. Because the framework is predicated on a particular set of assumptions, it might fail to consider the fiscal or cultural differences across other nations or areas. Fourth, this framework may not accurately capture the needs of businesses. Businesses may have different needs than individuals, and this tool may not accurately capture these needs. For example, companies may need access to additional information and services than individuals, such as capital or advice on legal or accounting matters.

The fact that current economic theory and taxonomy ignore the larger socioeconomic environment in which customers make decisions is another drawback of these theories. The framework assumes that all consumers are making decisions in the same environment, which ignores the fact that diverse clients may have dissimilar levels of access to resources and information. It means that the framework does not consider that particular groups of consumers may face additional barriers to making informed decisions in the market. Finally, the framework does not consider the potential for consumer behavior to change over time. As needs and technologies evolve, so too do consumer behaviors and preferences. The framework does not consider that consumers may not always remain in a similar category and may move between different categories as their behavior changes. This aspect could lead to regulation being implemented, which is not suited to the changing behaviors of consumers.

Recommendations/Areas of Improvements

Several improvement areas should be considered to make the framework more effective in regulating the markets. The first area of improvement is the need to recognize different types of consumers. The current framework only recognizes four categories of consumers. It does not consider that consumers may have different levels of understanding about an item or service. For instance, a ‘vulnerable’ client may not comprehend the long-term repercussions of a particular merchandise, but an ‘informed’ consumer may be able to understand the long-term consequences and make a more informed decision.[25] Regulators need to recognize these differences to create an environment where consumers can make informed decisions. A second area of improvement is considering the various factors influencing consumer behavior. The current framework does not consider external factors in consumer decision-making, such as marketing and advertising.[26] For example, a ‘vulnerable’ client may be swayed by persuasive marketing messages, while an ‘informed’ consumer may not be convinced. Regulators need to consider the various factors that influence consumer behavior to create an environment where consumers can make informed decisions without being unduly influenced by external factors.

A third area of improvement is the need to recognize the role of technology in consumer decision-making. The current framework does not consider the role of technology, such as artificial intelligence and machine learning, in consumer decision-making. For example, a ‘vulnerable’ consumer may be swayed by automated decision-making algorithms, while an ‘informed’ consumer may be more likely to decide based on their understanding and knowledge. Regulators need to recognize the role of technology in consumer decision-making to create an environment where consumers can make informed decisions without being unduly influenced by automated decision-making algorithms. Finally, the current framework does not consider the role of market forces in consumer decision-making. For example, a ‘vulnerable’ consumer may be swayed by market forces such as supply and demand, while an ‘informed’ consumer may be more likely to decide based on their understanding and knowledge of the market. Regulators need to consider the role of market forces in consumer decision-making to create an environment where consumers can make informed decisions without being unduly influenced by market forces.

Conclusion

In conclusion, the existing economic theory and taxonomic framework, which identifies consumers as ‘average,’ ‘vulnerable,’ ‘informed,’ or ‘confident,’ is helpful for regulators in understanding the complexity of consumer markets. Regulators can better establish laws and regulations that offer the necessary incentives for corporations to operate in the best values of clients by recognizing the various sorts of consumers and their requirements. This taxonomy helps enhance consumer protection by enabling regulators to tailor the rules to the specific needs of a particular consumer. It provides a valuable framework for determining the level of security required for a particular consumer and how best to achieve that protection. In competitive markets, consumer protection laws may be less necessary. Numerous potential limitations may affect regulation when using this framework, such as its simplicity, lack of complexity, its lack of ability to capture differences between countries or regions, and its lack of ability to capture the requirements of businesses. However, several areas of improvement should be considered to make the framework more effective in regulating the markets. These areas of development include identifying various consumer types, taking into account the various elements that affect consumer behavior, acknowledging the importance of technology and market forces on consumer decision-making, and more. With these improvements, the economic theory and taxonomic framework can more effectively regulate the markets and protect consumers.

Bibliography

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Bezpartochnyi, M, ‘European model of consumer protection’ (2016).

Bouteska, Ahmed, and Boutheina Regaieg, ‘Loss aversion, the overconfidence of investors and their impact on market performance evidence from the US stock markets’ (2020) 25(50) 451-478 Journal of Economics, Finance and Administrative Science.

Brown, Sarah, ‘Vulnerable consumers in financial services and access to justice: The regulatory response’ (2020) 68-84 In Vulnerable Consumers and the Law.

Buhalis, Dimitrios, and Katerina Volchek, ‘Bridging marketing theory and big data analytics: The taxonomy of marketing attribution’ (2021) 56 102253 International Journal of Information Management.

Chawla, Neelam, and Basanta Kumar, ‘E-commerce and consumer protection in India: the emerging trend’ 180, no. 2 (2022) 581-604 Journal of Business Ethics.

Chen, Yanyu, E. Kusuma Kumara, and V. Sivakumar, ‘Investigation of finance industry on risk awareness model and digital economic growth’ (2021) 1-22 Annals of Operations Research

Clapp, Jennifer, ‘The problem with growing corporate concentration and power in the global food system’ (2021) 2(6) 404-408 Nature Food.

Giliker, Paula, ‘The Consumer Rights Act 2015–a bastion of European consumer rights?’ 37, no. 1 (2017) 78-102 Legal Studies

Giliker, Paula, ‘The Consumer Rights Act 2015–a bastion of European consumer rights?’ (2017) 37(1) 78-102 Legal Studies.

Hao, Yuna, Behrang Vand, Benjamin Manrique Delgado, and Simone Baldi, ‘Market Manipulation in Stock and Power Markets: A Study of Indicator-Based Monitoring and Regulatory Challenges’ (2023) 16(4) 1894.

Hill, Ronald Paul, and Eesha Sharma, ‘Consumer vulnerability’ 30, no. 3 (2020) 551-570 Journal of Consumer Psychology.

Incardona, Rossella, and Cristina Poncibo, ‘The average consumer, the unfair commercial practices directive, and the cognitive revolution’ 30, no. 1 (2007) 21-38 Journal of consumer policy

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Kerber, Wolfgang, ‘Digital markets, data, and privacy: competition law, consumer law and data protection’ (2016) 11(11) 856-866 Journal of Intellectual Property Law & Practice.

Kumar, Ramesh, Raiswa Saha, Sekar PC, and Richa Dahiya, ‘Examining the role of external factors in influencing green behaviour among young Indian consumers’ (2019) 20(4) 380-398 Young consumers.

Lee, Joseph, ‘Access to finance for artificial intelligence regulation in the financial services industry’ (2020) 731-757 European Business Organization Law Review 21.

Micklitz, Hans-W, ‘Squaring the Circle: Reconciling Consumer Law and the Circular Economy’ (2019) 229 J. Eur. Consumer & Mkt. L. 8

PH, Haritha, ‘Mobile payment service adoption: understanding customers for an application of emerging financial technology’ (2022) Information & Computer Security

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Wang, Xuequn, Mina Tajvidi, Xiaolin Lin, and Nick Hajli, ‘Towards an ethical and trustworthy social commerce community for brand value co-creation: A trust-commitment perspective’ (2020) 167 137-152 Journal of Business Ethics.

Weissbrodt, David, and Muria Kruger, ‘Norms on the responsibilities of transnational corporations and other business enterprises with regard to human rights’ (2017) 199-220 In Globalization and International Investment.

Yap, Sheau‐Fen, Yingzi Xu, and LayPeng Tan, ‘Coping with crisis: The paradox of technology and consumer vulnerability’ 45, no. 6 (2021) 1239-1257 International Journal of Consumer Studies.

Yenipazarli, Arda, ‘Incentives for environmental research and development: Consumer preferences, competitive pressure and emissions taxation’ (2019) 276(2) 757-769 European Journal of Operational Research.

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[1] Micklitz, Hans-W, ‘Squaring the Circle: Reconciling Consumer Law and the Circular Economy’ (2019): 229 J. Eur. Consumer & Mkt. L. 8

[2] Chen, Yanyu, E. Kusuma Kumara, and V. Sivakumar, ‘Investigation of finance industry on risk awareness model and digital economic growth’ (2021): 2 Annals of Operations Research

[3] Chawla, Neelam, and Basanta Kumar, ‘E-commerce and consumer protection in India: the emerging trend’ 180, no. 2 (2022): 582 Journal of Business Ethics

[4] Incardona, Rossella, and Cristina Poncibo, ‘The average consumer, the unfair commercial practices directive, and the cognitive revolution’ 30, no. 1 (2007): 21 Journal of consumer policy

[5] Acquisti, Alessandro, Idris Adjerid, Rebecca Balebako, Laura Brandimarte, Lorrie Faith Cranor, Saranga Komanduri, Pedro Giovanni Leon et al, ‘Nudges for privacy and security: Understanding and assisting users’ choices online’ 50, no. 3 (2017): 1-41 ACM Computing Surveys (CSUR)

[6] Hill, Ronald Paul, and Eesha Sharma, ‘Consumer vulnerability’ 30, no. 3 (2020): 551 Journal of Consumer Psychology

[7] Rainsberger, Livia, ‘The Modern Customer—The PHANTOM’ In The Modern Customer–the PHANTOM: Customers on the Run: How Sales must Respond to Radically New Buying Behavior (2023) 36. Wiesbaden: Springer Fachmedien Wiesbaden

[8] PH, Haritha, ‘Mobile payment service adoption: understanding customers for an application of emerging financial technology’ (2022) Information & Computer Security

[9] Lee, Joseph, ‘Access to finance for artificial intelligence regulation in the financial services industry’ (2020) 732 European Business Organization Law Review 21

[10] Giliker, Paula, ‘The Consumer Rights Act 2015–a bastion of European consumer rights?’ 37, no. 1 (2017) 79 Legal Studies

[11] Yap, Sheau‐Fen, Yingzi Xu, and LayPeng Tan, ‘Coping with crisis: The paradox of technology and consumer vulnerability’ 45, no. 6 (2021) 1239 International Journal of Consumer Studies

[12] Brown, Sarah, ‘Vulnerable consumers in financial services and access to justice: The regulatory response’ (2020) 68 In Vulnerable Consumers and the Law

[13] Slade, Jennifer, and David Grant, ‘The Consumer Protection from Unfair Trading Regulations: A Commentary (Part Two)’ (2010) 2(2) 94 Travel Law Quarterly

[14] Giliker, Paula, ‘The Consumer Rights Act 2015–a bastion of European consumer rights?’ (2017) 37(1) 79 Legal Studies.

[15] Bouteska, Ahmed, and Boutheina Regaieg, ‘Loss aversion, overconfidence of investors and their impact on market performance evidence from the US stock markets’ (2020) 25(50) 452 Journal of Economics, Finance and Administrative Science

[16] Hao, Yuna, Behrang Vand, Benjamin Manrique Delgado, and Simone Baldi, ‘Market Manipulation in Stock and Power Markets: A Study of Indicator-Based Monitoring and Regulatory Challenges’ (2023) 16(4) 1894

[17] Yirga, Dejene, ‘Consumers’ Protection in Microfinance Institutions in North Shewa Zone of the Amhara National Regional State: The Law and the Practice’ PhD diss., 2021.

[18] Weissbrodt, David, and Muria Kruger, ‘Norms on the responsibilities of transnational corporations and other business enterprises with regard to human rights’ (2017) 199 In Globaization and International Investment

[19] Kerber, Wolfgang, ‘Digital markets, data, and privacy: competition law, consumer law and data protection’ (2016) 11(11) 856 Journal of Intellectual Property Law & Practice

[20] Bezpartochnyi, M. “European model of consumer protection.” (2016) 1.

[21] Yenipazarli, Arda, ‘Incentives for environmental research and development: Consumer preferences, competitive pressure and emissions taxation’ (2019) 276(2) 757 European Journal of Operational Research

[22] Clapp, Jennifer, ‘The problem with growing corporate concentration and power in the global food system’ (2021) 2(6) 404 Nature Food

[23] Buhalis, Dimitrios, and Katerina Volchek, ‘Bridging marketing theory and big data analytics: The taxonomy of marketing attribution’ (2021) 56 102253 International Journal of Information Management

[24] Just, David R., and Julie M. Goddard, ‘Behavioral framing and consumer acceptance of new food technologies: Factors influencing consumer demand for active packaging’ (2023) 5 Agribusiness

[25] Wang, Xuequn, Mina Tajvidi, Xiaolin Lin, and Nick Hajli, ‘Towards an ethical and trustworthy social commerce community for brand value co-creation: A trust-commitment perspective’ (2020) 167 137-152 Journal of Business Ethics

[26] Kumar, Ramesh, Raiswa Saha, Sekar PC, and Richa Dahiya, ‘Examining the role of external factors in influencing green behaviour among young Indian consumers’ (2019) 20(4) 380 Young consumers