Consumer-protection law is vital for ensuring that market-based economies work in the economic interest of consumers as well as businesses, and thus to the benefit of society as a whole. This is well understood. Caveat emptor—“let the buyer beware”—may have made sense as the default risk allocation between buyer and seller in the village marketplaces of yore, in which transactions were relatively small, and buyers and sellers were likely to know and expect future dealings with each other. These features would naturally encourage traders to comply with community-generated and community-enforced norms of commercial fair dealing.1 In these admittedly idealized markets, sellers who cheated would quickly be found out, and they would face high social and economic costs, in contrast to the social and economic costs sellers face in modern markets, where traders are more likely to be strangers engaged in one-off transactions. The idealized markets of yore also dealt mostly in physical goods, which allowed buyers the opportunity to examine the goods before purchase.
Modern markets, especially online markets, differ from the idealized village marketplace in significant ways. The scope and scale of most contemporary online markets, for example, make it unrealistic to hope that relational obligations or a shared sense of morality could fully counterbalance incentives to cheat. On a recent “Prime Day” sales event, for example, Amazon sold over 300 million items in 20 different international markets, with total sales exceeding $12 billion.2 We note these figures not to suggest that Amazon cheats customers, but rather to underscore the observation that, in light of its size, it would be unrealistic to think that Amazon would temper its behavior out of fear that a group of customers, unhappy with a particular product or misrepresentation, could sour a sufficient portion of its buyers (124 million Amazon Prime customers in the United States in 2019) 3 and/or sellers (more than 1.1 million third-party sellers in the United States in 2019) 4 such that those customers would reduce their dealings with Amazon in numbers that would have a material effect on Amazon’s revenue or income. Small-scale acts of cheating in such circumstances are simply unlikely to be penalized in a meaningful way.5 If the cost of cheating is low, as it is in many online markets, then the relative incentive to cheat is high. Such conditions, especially when combined with other features of online markets that distinguish them from other markets, call out for vigorous enforcement of strong consumer protections.6 This is not the first time that markets have undergone significant changes, and these changes often have generated legal and regulatory responses. Because new products, new services, and new methods for conducting transactions all create new opportunities for mischief and deception, old rules may need to be revamped to fit the dangers posed by new times. Lawmakers and regulators typically have responded to these shifts with new sets of rules that modify the background principle of caveat emptor in ways that are tailored to the specific new dangers at hand. In the United States, for example, Congress enacted the Federal Food, Drug, and Cosmetic Act of 1938 in response to an increase in industrialized production of these products and the resulting high rates of contamination and other dangers.7 Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to restrain excesses in the banking industry that disadvantaged vulnerable borrowers and contributed to the financial crisis of 2007-08 and the Great Recession.
Just as industrialization of food and proliferation and securitization of subprime loans did in the past, the explosive growth of e-commerce and adsupported platforms has substantially transformed the consumer experience and the consumer-merchant relationship. This transformation has exposed new and different consumer vulnerabilities. Yet, apart from the European Union, which recently adopted the Digital Services Act,9 the United States and other jurisdictions have not undertaken systemic reviews of their consumer protection regimes to ensure they are fit for the challenges we see in online markets. The failure to update consumer-protection law is concerning in part because we rely on it to advance a broad range of interests in addition the purely economic interests of market participants. The failure to update the law may undermine these goals as well. Some of these goals are mentioned in a set of consumer-protection guidelines issued by the United Nations and updated periodically. These “Guidelines for Consumer Protection” outline eleven “legitimate needs.” 10 Some of these consumer needs are traditional “economic” consumer needs, but several are not. They range from the practical (access to necessary goods, access to information sufficient to make informed choices) to the aspirational (protection of vulnerable groups, protection from hazards) to the inspirational (promotion of sustainable consumption, freedom to organize, global free flow of information) and back again to the quotidian (access to dispute resolution).
Sustainable consumption and the free flow of information may be worthy goals, but they are beyond the scope of this Article. Rather, we focus here on consumer needs that are closely tied to their economic interests. Nor do we discuss diffuse social or societal harms—for example in relation to mental health or democracy—that typically are associated with harmful online content delivered to consumers by social media or other platforms that participate in online markets. These issues are important as well, and consumer-protection law can and in some instances does protect against societal in addition to individual consumer harms. Similarly, we do not discuss whether the platforms that recommend and deliver that harmful content should be deemed to suffer from design defects or to be subject to strict liability when they cause harm (although we see no economic reason to treat physical products sold online differently, in this regard, from purely digital ones sold nor bartered online).12 These questions are not the focus of this Article either. Our principal concern is protecting consumers’ economic interests. We focus our attention, therefore, on online transactions between firms and consumers. This set of transactions includes those in which digital products are ostensibly provided for “free”—in other words, consumers pay a zero-cash price—but where consumers provide consideration in the form of data and attention, or a promise to provide data and attention.
This Article provides economic perspective and policy thinking on these important questions just touched upon. It starts by discussing the economic rationale for consumer protection, including explaining its key role in protecting against market power and ensuring competitive markets that deliver good consumer outcomes. It goes on to highlight some key differences between online and offline markets, explains what concerns these differences are likely to create for consumers and regulators, and provides a menu of policy proposals for addressing these concerns. Many of the proposals are intended to be applied to all online firms, both traders and platforms, but some are targeted at the largest online gatekeeper platforms. In providing an economic perspective, this Article does not endeavor to assess the extent to which these concerns are addressed by existing consumer protection legislation, not least because of variation in coverage across jurisdictions. This Article presents a menu of regulatory and enforcement options––all flowing from basic economic principles––that would protect consumers and foster more efficient digital markets. Regulators and legislators might choose to enact some, but not all, of the solutions proposed here depending on the specifics of their regulatory regimes or their desire or mandate for intervention.
In a similar vein, each of this Article’s authors may not endorse every proposal we outline below. Nor is there consensus among the authors on which of the proposals are most important or most effective in protecting consumers and promoting efficiency. Nonetheless, all authors agree that each of the concerns and proposals identified herein is supported by sound, modern economic principles; we offer these proposals based on that consensus.