NBSIR 80-2016

AlllDS 1QEED5

The Economics of Consumer

Product Information

Rachel Dardis

Center for Consumer Product Technology

National Engineering Laboratory

National Bureau of Standards

U.S. Department of Commerce

Washington, D.C. 20234

March 1 980

Final

Issueo May 1 980

Prepared for National Bureau of Standards

Washington, D.C. 20234

-QC

100

.056

80-2016

1580

L

NBSIR 80-2016

THE ECONOMICS OF CONSUMER

PRODUCT INFORMATION

Rachel Dardis

NATtONAL AUKBAU

or STANVABUS

LltiRART

OCT I 0 1980

riot a

- - r _ QCloo

''<> &- i.' iG

Center for Consumer Product Technology

National Engineering Laboratory

National Bureau of Standards

U.S. Department of Commerce

Washington, O.C. 20234

March 1 980

Final

Issued May 1 980

Prepared for

National Bureau of Standards

Washington, D.C. 20234

U.S. DEPARTMENT OF COMMERCE, Philip M. Klutznick, Secretary

Luther H. Hodges, Jr., Deputy Secretary

Jordan J. Baruch, Assistant Secretary for Productivity. Technology, and Innovation

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Director
FOREWORD

While considering a program to provide performance

information on cons-umer products , the Department of Commerce and

its National Bureau of Standards sought answers to questions such

as

:

(1) Are standardized test methods generally available?

(2) How would performance labeling of products affect

manufacturers ?

C3) Would a Government program to provide performance

information be accepted' and supported by industry?

C4) To what extent would consumers benefit from such a

program?

This study, a review of the relevant literature on the economics

of consumer product information, was part of this search.

ii
SUMMARY

Objectives

Interest in consumer information in recent years reflects

technological and social changes which have increased the

complexity of the consumer decision-making process. The

proliferation of products , brands , and models has been

accompanied by decreased communication between buyer and seller

due to the growth of mass marketing and the emergence of time as

a major constraint in consumer information processing. The major

objective of this study was to examine the economic principles

underlying the acquisition and provision of consumer product

information. The analysis should provide an understanding of

reasons for information failures in the marketplace and problems

faced by policy makers in attempting to correct such failures

Benefits from Consumer Product Information

The direct benefits from consumer product information

include more effective communication of consumer preferences in

the marketplace and increased consumption efficiency. In the

economic theory of consumer behavior the preferences of the

consumer in conjunction with income and market prices determine

what goods and services are consumed. Communication of consumer

wants in the marketplace, in turn, influences production. If the

consumer is uninformed, however, the marketplace no longer

communicates consumer wants and the concept of consiomer

sovereignty is invalidated.

The second direct benefit is the cost savings due to

improvements in consumption efficiency. Information concerning

product characteristics which can be determined objectively

provides a basis for determining the consumer's efficiency

frontier of product characteristics. The consumer's subjective

preferences for characteristics then determine the particular

combination of characteristics and goods selected. Information

plays an essential role in locating the efficiency frontier.

The gains from product information are based on the loss in

consumer welfare due to the existence of comparable products for

different prices or the discrepancy between actual and perceived

product characteristics . The greater the disparity between

prices of products and between actual and perceived product

characteristics, the greater the benefits from product

information.

The indirect benefits from product information include the

impact of information on market structure and product quality.

Consiamer ignorance reduces competition based upon price and

quality and creates a potential barrier to entry for new firms in

view of the importance attached by inexpert buyers to brand name

iii
and firm reputation. While there are no incentives to improve

product quality when the consumers are ignorant, efforts to

reduce costs in order to increase the firm's market share and/or

profits will frequently lead to lower quality products.

Economics of Information Acquisition

Consumer goods may be classified into two categories—search

goods and experience goods. The consumer may obtain information

about product performance prior to purchase by searching for and

acquiring information or may rely on actual experience with the

product during consiamption . The search process is likely to be

of particular importance in the case of high technology, durable,

expensive consumer goods in contrast to inexpensive, frequently

purchased goods where the consumer ' s own past experience is a

reliable source of infoimiation

.

The degree of information acquired by the consumer is a

function of perceived costs and benefits including both monetary

and non-monetary factors. If the perceived benefits are low due

to consumer ignorance of market deficiencies, and the perceived

costs are high due to information processing requirements, then

the degree of information obtained by the consumer may be

relatively low. Failure to use existing information should not,

therefore, be attributed to consumer irrationality but rather to

the costs of information collection and processing relative to

the perceived benefits

.

Consumer Information Gap

Three major studies were examined to determine if there had

been changes in price-quality relations for durable products over

time and whether price-quality relations were affected by product

category (9/24,37). All three studies used product ratings data

from consumer testing magazines (Consumer Reports and Consumers

Research Magazine ) , and obtained rank correlation coefficients

for product price and quality. Twenty-seven percent of the

product tests analyzed in 1960-67 had significant positive pricequality relations compared to 31 percent for the 1970-77 time

period. The mean rank correlation coefficients for the two time

periods were 0.36 and 0.27. The results of the three studies

indicate that 1) markets for consumer goods are functioning

imperfectly, 2) market performance has not changed greatly in the

past two decades, 3) price-quality relations are characterized by

considerable instability within brands and product categories

,

and 4) price-quality relations for major appliances reflect an

absence of search behavior by consumers

.

Reasons for Information Failures in the Marketplace

The existence of information failures reflects a variety of

technological and social changes within the past decades.

IV
However, the incentives for producers or consumers to close the

gap may be lacking. Sellers gain from product differentiation,

and product information increases price competition and reduces

the market power of established brand names. While advertising

provides information, its primary purpose is to sell products,

not to facilitate the consumer decision-making process

.

Consumers face several problems in acquiring and processing

information. First comparable objective information on product

characteristics and performance for different brands is generally

lacking. Second, the costs of information processing are high

due to technical requirements and time constraints. Thus, the

consumer is likely to rely on other factors such as price and

firm size and reputation. However, reliance on the judgment of

sellers neglects the fact that such judgments are exercised for

the benefit of sellers rather than for buyers. Finally, the

consumer may not perceive that he is operating inefficiently

since consumption inefficiency is not signaled in the marketplace

in a manner similar to production inefficiency. The lack of

incentives for buyers and sellers to change their existing

behavior patterns means, in turn, a continuation of the consumer

information gap.

Solutions to the Problem

Deficiencies with respect to the demand and supply sides of

the market and the existence of externalities due to indirect

benefits provide justification for developing consumer

information programs . Voluntary programs include comparative

testing, informative labeling, standards, and quality

certification. Each of these programs differs with respect to

the degree of information provided, information processing

requirements, and consumer choice. Comparative testing differs

from other programs in that manufacturers generally are not

involved in the selection of relevant product characteristics and

identification of appropriate test methods. The other programs

involve input from business and industry, consumer organizations,

and other private or public organizations.

Mandatory programs are generally used when consumer

protection is needed and voluntary programs are likely to be

inadequate. Mandatory labeling is more restrictive than

voluntary labeling but less restrictive than mandatory standards

or product banning. Mandatory standards may provide information

but their primary purpose is to protect the consiimer. They are

frequently advocated in areas of health or safety. In other

instances, recognition of the importance of freedom of choice

results in acceptance of the consumer's right to be wrong since

the alternative of supplying consumers with what they "really

need" is both \infeasible and undesirable.

Major issues in the provision of consumer information

include: 1) how much information should be provided, 2) what is

V
the best mechanism for achieving the desired level of

information, and 3) the distribution of program costs and

benefits. Again the level of information depends on monetary and

non-monetary costs and benefits. Criteria such as adequacy,

efficiency, and feasibility are important in program assessment

and are frequently interrelated. Thus, manufacturers and

retailers may be the most efficient providers of information in

view of familiarity with product performance and access to

customers. However, their information is likely to be inadequate

since its primary purpose is to sell products. Feasibility

pertains to buyer or seller response which may prevent or

decrease the likelihood of success of a particular program.

Disinterest on the part of buyers and sellers is a major reason

for the failure of information programs. A second, and perhaps

more important reason, is the divergence between consumer and

producer interests. Some producers gain from consumer ignorance,

and the gains accruing to others from the reduction in consumer

ignorance are purchased at their expense.

The divergence between consumer and producer interest may be

a major reason underlying the consumer information gap. The

continuation of this gap affects not only consumer welfare but

the economy as a whole. Information is an essential element in

the efficient performance of the free market system. Failure to

generate adequate information threatens not only the performance

of the system but also the system itself since intervention may

occur to correct market deficiencies. The divergence between

consumer and producer interests is , in part , responsible for the

perpetuation of the consumer information gap. While such a

divergence may be expected to continue , the information gap may

be reduced eventually as both parties recognize their mutual

interest in the free market system.

vi
CONTENTS

Page

Foreword ii

Simmary iii

Abstract 1

1. Introduction 1

2. Benefits from Consumer Product Information .... 2

2.1 Direct Benefits 2. 2.1.1 Communication of Consumer

Preferences 2

2.1.2 Consximption Efficiency 4

2.1.3 Estimating the Direct Gains from

Consumer Product Information 7

2 . 1 . 3 .

1

Comparable Products for

Different Prices 7

2 . 1 . 3 .

2

Discrepancy Between Actual

and Perceived Product

Characteristics 9

2.2 Indirect Benefits 11

2.2.1 Market Structure and Performance ... 12

2.2.2 Product Quality 13

3. Economics of Information Acquisition 14

3.1 Information Process 14

3 . 2 Determinants of Search Activity 15

4. The Consumer Information Gap 17

4.1 Morris and Bronson, and Gieser Studies:

1960-1977 18

4.1.1 Procedure 18

4.1.2 Results 19

4.2 Sproles Study: 1972-74 22

4.3 Conclusion 24

5. Reasons for Information Failures in the

Marketplace 24

5.1 Background 24

5.2 Responses to the Information Gap 25

vii
6. Solutions to the Problem

Page

28

6.1 Voluntary Information Programs 28

6.1.1 Comparative Testing 28

6.1.2 Informative Labeling 29

6.1.3 Standards 3 0

6.1.4 Quality Certification 31

6.1.5 Warranties and Service Contracts ... 32

6.1.6 Role of Information Seekers 33

6.2 Mandatory Programs 33

6.2.1 Informative Labeling 33

6.2.2 Mandatory Standards 34

6.3 Comparison of Voluntary and Mandatory

Programs 35

6.4 Consumer Protection and Producer Protection . 35

6.5 Economics of Information Provision 36

6.5.1 Major Issues 36

6.5.2 Conclusion 40

References 42

viii
LIST OF TABLES

Table Page

No.

1 Summary of Price-Quality Relations by Time:

1960-1977 20

2 Summary of Price-Quality Relations by Product

Category: 1960-1977 21

3 Summary of Price-Quality Relations by Product

Category: 1972-1974 23

LIST OF FIGURES

Figure Page

No.

1 Utility Maximization 3

2 Lancaster Model 6

3 Consumer Surplus 8

4a Product Performance Overrated 10

4b Product Performance Underrated 10

5 The Consumer's Search Process 16

6 Cost and Benefits of Information Provision . 37

ix

THE ECONOMICS OF CONSUMER PRODUCT INFORMATION

Rachel Dardis

The major objective of this study was to examine

the economic principles underlying the provision

and acquisition of consumer product information.*

The direct and indirect benefits from product

information and the economics of consiomer information

acquisition comprise the first part of the study.

The existence of the consumer information gap

within the past two decades is investigated in

the second part of the study. Reasons for

information failures in the marketplace are then

examined leading to a discussion of various

methods for increasing the level of consoamer

product information. The analysis should provide

an understanding of reasons for information

failures in the marketplace and problems faced

by policy makers in attempting to correct market

deficiencies

.

1. INTRODUCTION

The major objective of this study was to examine the

economic principles underlying the provision and acquisition of

consximer product information. The increased interest in consumer

information in recent years reflects an awareness of changes with

respect to product technology, production, distribution, and

consumer life styles which have resulted in information failures

in the marketplace. Economics can assist in an assessment of

this situation in several ways. First, information is a service

whose provision and acquisition entails monetary and other costs.

Both the costs and benefits of information must be considered,

therefore, in determining whether there is an adequate level of

information utilization in the marketplace. Second, information

plays a major role in ensuring a competitive and efficient market

system that is responsive to consumer needs. These indirect

benefits pertain to all consumers in contrast to the cost savings

achieved by an individual consumer as a result of product

information. The effect of such externalities may mean that the

current level of information is less than optimal. Finally, the

divergent impact of information on producer and consumer

interests must be recognized in determining reasons for

information failures in the marketplace and in developing

appropriate information strategies

.

*Readers interested in the economics of information in general

are referred to a recent comprehensive review article by Hirshleifer

and Riley (14)

.
2. BENEFITS FROM CONSUMER PRODUCT INFORMATION

Consumer product information yields both direct and indirect

benefits . Direct benefits include more effective communication

of consumer preferences in the marketplace and increased

consumption efficiency. The theory of consumer surplus (or

compensating variation in income) may be used to estimate the

gains from consumption efficiency. The impact of consumer

information on market structure and product quality comprise the

indirect benefits.

2 . 1 Direct Benefits

2.1.1 Commianication of Consoomer Preferences

According to the economic theory of consumer behavior, the

individual possesses a preference f\inction which is maximized

subject to the budget constraint. The economic model can be

illustrated by considering a simplified model with two goods , X

and Y, which the consumer may purchase at prices P^^ and P„. The

budget constraint in this instance is given by

M = XP + YP

X y

where M is the consumer ' s income and X and Y refer to quantities

of the two goods purchased. In Figure 1, the budget line is

given by the line MN. Quantities of X and Y are measiired on the

horizontal and vertical axes, respectively. As the formula for

the budget constraint indicates, the budget line is affected by

consumer income and the prices of X and Y. Thus an increase in

the price of one good relative to the other will change the slope

of the budget line while an increase in money income (prices

remaining unchanged) will result in a parallel shift outward of

the budget line.

The consumer's preference function is illustrated by a set

of indifference curves U]_ , U2 ^ U3 in Figure 1. Each indifference

curve represents a collection of bundles (varying quantities of X

and Y) which yield equal levels of satisfaction to the consumer.

Higher indifference curves represent higher levels of

satisfaction since it is assumed that the consumer prefers more

of each good to less. Satisfaction or utility is measured in an

ordinal manner which means that, while bundles along U3 are

preferred to bundles along U2

/ the degree to which they are

preferred (twice as much, three times as much) is not considered.

Utility maximization subject to the budget constraint

results in the consumer purchasing quantities of X and Y given by

point E in Figure 1. Point E will remain an equilibrium

situation unless prices, income or preferences change.

2
QUANTITY

FIGURE 1. UTILITY MAXIMIZATION

3
Certain assumptions underlying the economic theory of

consumer behavior are important:

1) prices are known,

2) performance characteristics of products are known, and

3) the consumer is rational.

Rationality refers to the consumer's ability to rank bundles

so that his preferences remain consistent and transitive. Thus,

in the case of three bundles A, B, and C, the consumer may prefer

A to B, B to A, or be indifferent between A and B. However, only

one outcome is possible so that the consumer cannot

simultaneously prefer A to B and B to A. This is the consistency

assumption. The transitivity assumption means that if A is

preferred to B and B is preferred to C then A must be preferred

to C.

The economic use of the term "rational" is quite limited and

implies no value judgment concerning how a particular consumer

allocates his budget. Each consumer (provided he is informed) is

deemed to be in the best position to select the particular bundle

of goods and services which yields the highest level' of

satisfaction. Each consumer's preference function is unique so

that consumers having identical incomes and paying the same

prices may select different quantities of goods and services.

Information plays a crucial role in the communication of

consumer wants in the marketplace and in the operation of

consumer sovereignty. The concept of consumer sovereignty has

been summarized by Fulop as follows: "it is the preferences of

consumers, as shown by the way in which they spend their money,

that determines what merchandise is produced and services

supplied" (8, p. 11). The concept of consumer sovereignty has

been debated at length and it has been challenged on many

grounds, in particular the gap between what consumers really want

(consiimer preferences) and what they buy due to inadequate

information (30,36,44). If the consumer is uninformed then the

marketplace can no longer act as a mechanism for communicating

consumer preferences , and the concept of consumer sovereignty is

invalidated.

2.1.2 Consumption Efficiency

The concept of consumption efficiency was introduced by

Lancaster in 1966 (17) . According to Lancaster goods are valued

for the collection of characteristics that they contain. He

assumes that the characteristics possessed by a good or a

combination of goods can be determined objectively and are the

same for all consumers. Examples of characteristics are proteins

and vitamins which may be obtained from a variety of food

4
products. The utility derived from a set of characteristics is

subjective and reflects the individual consumer's preference

function. The purchase process may then be separated into two

stages. In the first stage the consumer determines the maximum

number of characteristics which might be obtained for a certain

dollar expenditure. This is called the efficiency frontier.*

When the efficiency frontier is combined with, the individual's

preference function, the combination of characteristics yielding

the highest utility is selected.

The Lancaster model can be illustrated by considering a

simplified model with three goods, X, Y and Z, each possessing

two characteristics A and B (Figure 21. The quantity of each

characteristic is measxired along the axes while the consumption

of goods X, Y, or Z yields a vector of characteristics given by

OX, OY, and OZ , respectively. Imposition of a budget constraint

yields an efficiency frontier abc where point a reflects the

maximum quantities of characteristics that may be obtained when

the consumer allocates his total income to good X. Points b and

c are derived in a similar manner. The lines joining points a,

b, and c reflect a combination of goods X and Y, Y and Z, and X

and Z . Given the preference map shown in the diagram the

informed consumer will select good Y and attain a level of

satisfaction given by U2 . In the absence of information

concerning Y, however, the consiimer will operate along line ^

selecting a combination of X and Z given by point d. In this

instance the consumer is operating within his efficiency frontier

and has a lower level of satisfaction as a result.

The Lancaster model may also be used to estimate the impact

of product innovation. Thus in the absence of good Y the

consumer's efficiency frontier is given by The introduction

of Y shifts the efficiency frontier outward. However, unless the

consumer is informed of the characteristics of good Y he will

remain at point d, within the new efficiency frontier.

Lancaster's approach is valuable in that it highlights the

importance of information in the consumer decision process.

*Hendler (13) has raised a major reservation concerning Lancaster's

model when the efficiency frontier is derived from a linear combination of goods. He argues that the utility from the consumption

of a single good is unlikely to be the sam.e as the utility from a

combination of goods even though both processes have the same number

of characteristics. Otherwise "the individual is indifferent to

whether he consumes one very sweet apple and one without any

sweetness (but otheirwise identical) or two mildly sweet apples,

as long as the sum of sweetness and all other characteristics are

the same" (13, p. 198). Hendler concludes that combinations of

goods thus provide a "characteristics possibility frontier" rather

than an "efficiency frontier" unless the consumer is indifferent

to the distribution of characteristics in each good.

5
QUANTITY

OF

CHARACTER I

FIGURE 2. LANCASTER MODEL

6
Lancaster also notes that there is no mechanism in the

marketplace for correcting consumption inefficiency. The

individual consumer located at point d is not aware of utility

foregone due to ignorance. In contrast producer inefficiency is

punished and efficiency rewarded through the profit and loss

mechanism.

2.1.3 Estimating the Direct Gains from Consumer Product

Information

The direct consiimer gains from product information may be

estimated by comparing changes in consumer surplus due to product

information. The market demand for a product is given in Figure

3. Price and quantity are measxired on the vertical and

horizontal axes respectively. The demand curve represents the

consumers ' willingness to pay for the product while the market

price represents the amount that is actually paid.* The

difference between willingness to pay and actual expenditures

comprises consumer surplus or the benefits to the consumer from

consiamption. Thus in Figure 3 consumers are willing to pay OabQ]^

for OQ-j^ units while actual expenditures only amount to 0P]^bQ]^.

Consumer surplus from the purchase of OQ]^ units for a price of Pj^

is thus equal to P^^ab.

As the diagram indicates the lower the market price the

greater the surplus accruing to the consumer. Thus a decline in

the market price from P-|_ to P 2 would increase consumer surplus to

P2ac.

2. 1.3.1 Comparable Products for Different Prices

Gains in the case of comparable products are based on the

existence of different product prices in the marketplace for

comparable products—a higher price which is paid in the absence

of information and a lower price which is paid once the consumer

is informed. For example, a subscriber to a comparative testing

magazine might find two comparable products with different

prices. Thus in Figure 3 the uninformed consumer may pay P^

while the informed consumer would pay P 2. The change in consumer

surplus when the product is purchased for P^^ compared to P 2 is

given by the area P 2Pibc. It is comprised of the cost difference

(P 2Pibf) and the additional gain to consumers from the purchase

of Q 1Q 2 units Cfbc)

.

*The compensated demand curve should be used in estimating consumer

surplus rather than the uncompensated demand curve. The two demand

curves are identical when the income effect of a price change is

zero. If the income effect of a price change is negligible, then

the uncompensated demand curve may be used in place of the

compensated demand curve.

7
PRICE

FIGURE 3. CONSUMER SURPLUS

8
2. 1,3.2 Discrepancy Between Actual and Perceived Product

Characteristics

Product performance information may affect existing users of

the product as well as potential users. In the case of existing

users it is convenient to consider two demand curves —a true

demand curve and a false demand curve.* The true demand curve

reflects the consiamers ' willingness to pay based on actual

performance characteristics, while the false demand curve

reflects the consumers ' willingness to pay based on perceived

performance characteristics. If the constamer is uninformed,

there is a gap between actual and perceived performance

characteristics and hence between the two demand curves

Two situations are possible when the consiamer is uninfomed.

First, consumers may overrate performance characteristics so that

the false demand curve lies to the right of the true demand

curve. In the second instance consaamers may underrate the

performance characteristics so that the false demand curve lies

to the left of the true demand curve.

The first situation is illustrated in Figure 4a. The true

and false demand cuarves are given by and Df respectively.

Uninformed consumers are willing to pay more for every quantity

than is justified since the product performance is overrated.

When the market price is P^ consumers piarchase units.

However, based on actual performance only Q2 units should have . been purchased. The loss to consumers from purchasing the

additional Q 2Q 1 units is given by the difference between consumer

expenditures on these units CQ23.bQ]^) and willingness to pay for

these units CQ 2 ^cQ]^) . The gain from product performance

information is thus given by the shaded area abc in Figure 4a.

The second situation—product performance underrated—is

shown in Figure 4b. In contrast to the first example, uninformed

consumers are willing to pay less for each quantity than is

justified by actual product performance. When the market price

is P]_, consumers purchase Q-j_ units. However, Q2 units should

have been purchased based on actual performance characteristics.

The loss in this instance arises from the failure to purchase the

additional units QiQ2

* difference between the consumers'

willingness to pay (Q]CbQ 2

) and actual expenditures (QiabQ2

) results in a loss of ^c which is equivalent to the gain from

consumer information.

The final benefit from product performance information

pertains to the entry of new purchasers in the marketplace for a

product once they are informed. Thus if the demand curve in

*The concept of true and false demand curves was introduced by

Peltzman in 1974 (29)

9
PRICE

FIGURE 4a. PRODUCT PERFORMANCE OVER-RATED

PRICE

10
Figure 3 represents new purchasers due to product information,

the consumer surplus accruing to these purchasers when the market

price is is given by the shaded area P^ab.

The previous discussion is based on unchanged market prices

once the consumer is informed. This is correct in the short-run

only if the industry supply curve is perfectly elastic. If the

supply curve is upward sloping, then the change in demand for the

overrated product (.Figure 4al will also result in a price decline

and a further increase in consiimer surplus. Thus benefits will

have been underestimated. The converse occurs in the case of an

underrated product or of entry of new p\irchasers since the market

price will rise. Assuming no barriers to entry in the affected

industries and the existence of equilibrium conditions initially,

price decreases or increases will result in the exit and entry of

firms in the long run. If the affected industries are

characterized by constant costs (i.e., factor prices remaining

unchanged as output changes) , then market prices should return

eventually to their initial levels . Thus the method is correct

for estimating consumer gains in the long run.

The greater the disparity between actual and perceived

product performance, the greater the benefits from product

information. It should be noted that this disparity is likely to

be affected by frequency of product purchase and the degree of

technological change associated with the product since both

affect the degree to which consumers can rely on past consumption

experiences. The more infrequently purchased the product, the

less opportunity the consiomer has to explore his consumption

possibilities set. It might be concluded, therefore, that

consumer information is of particular importance in the case of

high technology durable consumer goods

.

Finally, not all of the direct benefits of product

performance information were included in this section. For

example, a major benefit in the case of durable goods is a

reduction in product failure and repair costs due to correct

maintenance or purchase of a more reliable product. Benefits

could be estimated by comparing changes in life cycle costs with

provision for time spent in repairing the item. However, it is

difficult to estimate other non-monetary costs such as consumer

annoyance and frustration.

2 . 2 Indirect Benefits

The indirect benefits from consumer product information

pertain to the impact of consumer ignorance on market structure

,

performance, and product quality. The resulting losses in

consumer welfare comprise a measure of indirect benefits, i.e.,

elimination of such a loss constitutes the indirect benefits

associated with consimer information.

11
2.2.1 Market Structure and Performance

According to Scitovsky C35) consumer ignorance affects

market structure and performance in the following ways

11 it reduces competition based upon price and quality,

21 it increases the use of advertising,

3) it creates a barrier to entry for new firms by setting a

high entrance fee, and

4) it facilitates collusion among existing firms since their

number is limited.

Scitovsky points out that the ignorant consumer is unable to

evaluate product quality and must use, therefore, indices of

quality such as price and firm size and reputation. As a result

price and quality competition is reduced since a lower price will

be considered as a sign of inferior quality, while the incentive

for quality competition is removed by the inability of the

consumer to distinguish good quality from bad. Firms in this

situation are more likely to engage in other forms of competition

such as advertising.

Scitovsky also notes the importance of "advertising,

service, and good will" in the uninformed market as a deterrent

to potential entry of new firms (35, p. 50). He believes that

advertising and product servicing are characterized by economies

of scale, thus favoring large firms and inhibiting fiinii entry.

However, firm's goodwill or consumer reliance on firm size and

reputation constitutes in Scitovsky ' s view the most important

obstacle to entry. The slow and costly process of establishing a

name and reputation in competition with established firms

constitutes a type of entrance fee which serves to protect those

firms.

One of the more interesting arguments presented by Scitovsky

is that the organization of the market and the degree of product

standardization or differentiation are variables which are

determined by (rather than determine) the degree of buyers'

information. Thus expert buyers generate one type of market

structure while ignorant buyers generate and perpetuate an

oligopolistic market structure. If this viewpoint is correct,

then consumer information programs may be as important as

antitrust action in ensuring competitive conditions in the

economy.

12
2.2.2 Product Quality*

Scitovsky comments on ttxe tendency for producers to refrain,

due to consumer ignorance, from product quality improvements

C35I. However, consximer ignorance may stimulate product

deterioration. The incentive for this was mentioned by

Chamberlin in 1953.

Any producer, by deteriorating his product

slightly, can reduce his cost and increase his

profits, either by selling at the same price as

before, which would give him a greater profit

per unit, or by combining the deterioration with

a lower price, which is what happens more

usually, and thereby increasing profits by

taking business away from his rivals. (3, p. 25)

Chamberlin concludes that product deterioration may continue

until the technological limits of product deterioration are

reached.

The fact that consumer ignorance serves as a deterrent to

product improvement while stimulating product deterioration

results in a loss to the consumer in several ways. First it

reduces consumer choice since it is likely that the manufacturer

of the higher quality product will respond to the potential loss

of business by also reducing product quality and price. In

Chamberlin's paraphrase of Gresham's law "bad products drive good

products off the market" (3, p. 26). According to Akerlof this

development is a major cost of dishonesty.

There may be potential buyers of good quality

products and there may be potential sellers of

such products in the appropriate price range;

however, the presence of people who pawn bad

wares as good wares tends to drive out the

legitimate business. The cost of dishonesty,

therefore, lies not only in the amount by which

the purchaser is cheated; the cost also must

include the loss incurred from driving legitimate

business out of existence. (1, p. 495)

*Quality , in this analysis , is defined as a set of product characteristics, including appearance and performance, which differentiates

one product from another. Homogeneous products have identical

product characteristics in contrast to heterogeneous products.

In some instances, heterogeneous products may be of comparable

/ i.e. , a deficiency with respect to one set of charac- teristics may be compensated by the presence or level of other product characteristics. Finally, the determination of a product's overall quality will depend on the relative importance attached to various product characteristics which may vary from consumer to

consumer.

13
The second loss component is due to the fact that product

deterioration and adulteration may result in levels of product

quality which would be rejected if they were known. Chamberlin

mentioned informative labeling for food and drug products as a

means of counteracting this situation since labeling would enable

the consumer to judge the acceptability of the product with

respect to both price and quality (3)

.

A recent study by

Lenahan, et al. , concerning nutritional labeling also found

considerable consumer interest in such labeling as a means for

making the food manufacturers accountable for the nutritional

quality of their food products (19)

.

3. ECONOMICS OF INFORMATION ACQUISITION

The influence of information costs and benefits on the

consumer's search activity is discussed in this section.

3.1 Information Process

According to Nelson (28) , consumer goods may be classified

into two major categories with respect to the consumer

information process . Search goods comprise the first category

while experience goods comprise the second category. Thus the

consumer may obtain information concerning product quality and

performance prior to purchase by the process of searching for and

acquiring information, or the consumer may rely on actual

experience with the product during consumption to provide

information. The particular information process used by the

consumer will depend on the cost of the process. Thus "there

will be goods for which this search procedure is inappropriate

goods it will pay the consumer to evaluate by purchase rather

than by search. If the purchase price is low enough, any even

moderately expensive search procedure would be ruled out" (28,

p. 312).

The experience process has an advantage over the search

process in that the consumer's own subjective preferences are

involved in product evaluation. In the case of the search

process the consumer must rely on information sources which may

differ from the consumer in their assessment of the relative

merits of different quality attributes. Thus product A may be

ranked higher than product B when one set of weights is assigned

to quality attributes , but may be ranked lower than product B if

another set of weights is assigned. The ideal situation is

obtained when the consumer, himself, assigns weights. This only

occurs when the consumer has the opportunity to sample and

experience a variety of products within a relatively short period

of time.

Experience , however , can be a costly method for obtaining

information if the product is expensive or has a major impact on

14
the health or safety of the consumer. It may also be inadequate

in the case of infrequently purchased products since the consumer

is in a position to purchase only a few items throughout his

lifetime. For this reason the search process is likely to be

preferred for expensive durable goods, i.e., high risk goods. In

the case of low risk goods (inexpensive, frequently purchased

items) experience is likely to be preferable.

3 . 2 Determinants of Search Activity

Two major kinds of information which may be obtained in the

search process are price and quality information. Stigler's

classic article on the economics of information pertains to the

search for price information (39) . Stigler discusses the

determinants of search by consumers as follows : "The larger the

fraction of the buyer's expenditures on the commodity, the

greater the savings from search and hence the greater the amount

of search" (39, p. 219). Techniques for minimizing the costs of

search include pooling of information and reliance on

advertising. Stigler points out that price advertising is

"equivalent to the introduction of a very large amount of search

by a large portion of the potential buyers" (39, p. 224).

The consumer decision process with respect to search

activity is illustrated in Figure 5 . The incremental costs and

benefits from obtaining each additional unit of information are

measured on the vertical axis while the level of information is

measured on the horizontal axis. The marginal costs (MC) of

search include financial costs as well as non-monetary costs such

as time and dislike for the search process. The marginal costs

of acquiring information are low initially reflecting the

availability of some information for the uninformed consumer.

However, as the scope of the search activity is increased the

marginal costs will rise reflecting travel, time, and other costs

in acquiring and processing the information.

The marginal benefit (MB) curve reflects diminishing returns

to the consumer from the search process. While the uninformed

consumer may experience considerable benefits in the initial

stages of information acquisition and processing, the benefits

may be expected to decline as the degree of information

increases. Total benefits will increase but at’ a decreasing

rate.* As in the case of costs, benefits include both monetary

and non-monetary considerations. The consumer may experience

cost savings during purchase or throughout the product life

cycle. In addition disutility due to product failure and time

spent on repairs is reduced.

*It is possible that marginal benefits might increase initially.

However, the law of diminishing returns should prevail eventually.

Under such circumstances the MB curve would first increase and then

decrease.

15
$

16

I
The optimum degree of information which the consumer should

obtain is given by the intersection of the marginal cost and

marginal benefit curves . If the search activity continues beyond

this point the additional costs of acquiring and processing

information will be greater than the benefits. The degree of

information acquired by the consumer is thus a function of

perceived costs and benefits. If the perceived costs are high

relative to the perceived benefits then the level of information

acquisition will be low.

Failure to use information, should not, therefore, be

attributed to consumer "irrationality" but rather to the costs of

acquiring and processing existing information relative to the

perceived benefits.

The analysis also indicates two methods of increasing the

consumer's level of information. The first method is to alert

the consumer to the potential benefits from obtaining product

information. If the perceived benefits are less than the actual

benefits then the information level will be less than optimum.

The second method is to reduce the costs of obtaining

information, thus shifting the marginal cost curve to the right.

For example, the cost to consumers from generating product

information is likely to be considerably higher than the costs of

buying information generated by others, e.g., comparative testing

and informative labeling. However, complex technical information

may impose high information processing costs on the consumer thus

shifting the marginal cost curve to the left. The net effect of

any information program must be considered, therefore, in

evaluating its effectiveness.

4. THE CONSUMER INFORMATION GAP

In 1945 Scitovsky (34) made two major observations

concerning price-quality relations for products . He noted that

the consiimer used price as a measure of quality since the

consumer was an inexpert buyer. However, Scitovsky stated that

while it was rational to judge quality by price in an expert's

market, it was not rational to do the same in a layman's or

consumer's market. Thus price and quality were unlikely to be

related.

Scitovsky 's first hypothesis was the subject of several

studies in the late 1960s and early 1970s

(2,10,11,15,18,23,32,38). Most of the studies confirm

Scitovsky 's hypothesis though it was found that the influence of

price was reduced when other quality indices such as brand name

and store were also provided to the consumer. Monroe (23) also

suggests that the consumer ' s perception of the price-quality

relations might vary according to product category and price.

17
Major tests of Scitovsky's second, hypothesis —that the

consumer goods market was characterized by inexpert buyers

resulting in the absence of positive price-quality relations

were conducted by Morris and Bronson (24,26), Sproles (37), and

Gieser (9). The results of these studies also confirm

Scitovsky's second hypothesis and indicate a consumer information

gap which does not appear to have narrowed to any great extent

within the past twenty years . The results of three studies are

summarized in the following sections.

4.1 Morris and Bronson , and Gieser Studies ; 1960-1977

4.1.1 Procedure

Both Morris and Bronson (24) and Gieser (9) used data from

Consumer Reports . This publication provides information

concerning product testing results and market prices. Products

are listed in order of overall quality. The use of Consumer

Reports

data to investigate price-quality relations has been

discussed in Maynes (21) and Morris (25) . In general the testing

agency's reputation and integrity is viewed as a major strength,

while the determination of the product's overall quality rating

is viewed as a major limitation. Thus the assignment of weights

to different product attributes is to some extent subjective, and

the weights assigned in Consumer Reports may differ from those

which would be used by some consumers . In addition certain

factors such as design or style are not considered in the quality

ratings which are based on objective considerations. Consumers

might be willing to pay more for some products with certain

design and style features. Place of purchase is another factor

which might influence the price the consumer is willing to pay in

view of variations in store services. However, the fact that the

average market prices provided in Consumer Reports were obtained

from a variety of stores mitigates this factor somewhat.

Price-quality relations were analyzed in both studies using

Spearman's coefficient of rank correlation since products were

only ranked with respect to quality. The use of ordinal data is

an inherent limitation since, as Sproles states, "a highly

positive rank correlation does not suggest that each increase in

price will be accompanied by an equally incremental increase in

quality" (37, p. 75). Sproles notes that a large increase in

price could be accompanied by a small increase in quality though

the contrary was also possible.

Notwithstanding such limitations, data from Consumer Reports

may be regarded as one of the most comprehensive and objective

data sets for investigating the existence of the consumer

information gap.

18
4.1.2 Results

In order to permit a comparison of price-quality relations

over time, only data for the following five product categories

are discussed.

White Goods: dishwasher, dryer, freezer, garbage disposer,

microwave oven, range, refrigerator, washing machine

Brown Goods: radio, recorder, record changer, stereo, T.V.

Other Major Appliances: dehumidifier, sewing machine,

vacuum cleaner, room air conditioner

Small Appliances: blender, food mixer, hair dryer

Cameras: 35 mm, movie, pocket.

Price-quality relations from 1960-67 and 1970-77 are given

in Table 1 for combined product categories . There were a

relatively small number of products reported for the 1960-67 time

period, and this should be borne in mind in evaluating the

results. Twenty-seven percent of the product tests in 1960-67

have significant positive price-quality relations compared to 31

percent for the 1970-77 time period. The corresponding figures

for the median rank correlation coefficients are 0.41 and 0.31.

There are considerable fluctuations from year to year in the

percentage of product tests with significant positive pricequality relations. The percentage ranges from 0 (1960, 1965,

1967) to 44 (1966, 1977). While there is an improvement over

time, it is relatively small. There are also fluctuations in

price-quality relations in a given year as shown by the range for

the rank correlation coefficients . Thus some product markets in

a given year are performing in a satisfactory manner while others

are unsatisfactory. However, the pattern is inconsistent from

year to year. Further examination of the data reveals that

product markets which are satisfactory in one year may be

unsatisfactory in another year. Both Morris and Bronson (24) and

Gieser (9) found positive and negative correlation coefficients

for the same product over time.

The low percentage of product tests with positive pricequality relations, the low correlation coefficients, and

fluctuations in price-quality relations suggest the existence of

inexpert buyers ' markets . As Scitovsky points out , in such a

case it is no longer rational to judge quality by price.

Price-quality relations by product category are given in

Table 2. Again the small number of observations for the 1960-67

time period limits product comparisons. For the 1970-77 time

period cameras had the greatest percentage of significant tests

19
Table 1. Summary of price-quality relations

by time: 1960-1977.

Time

Period

Number of

Product Tests

Percentage of

Significant

Relations

Rank C

Coef

Median

orrelation

f icient

Range

1960 1 0 .41 .41

1961 3 33 .15 .41 to -.12

1962 5 20 .33 .57 to .20

1963 8 25 .39 .74 to -.04

1964 5 40 .41 .93 to -.12

1965 4 0 .34 .41 to .30

1966 9 44 .39 .96 to -.23

1967 2 0 — •

00 to .38

1970 12 33 .39 .60 to -.42

1971 12 41 .31 .75 to -.03

1972 15 20 .27 .69 to -.35

1973 9 22 .22 .74 to -.50

1974 17 23 .23 .84 to -.39

1975 10 30 .42 .59 to -.83

1976 12 33 ,32 •

00 to -.66

1977 18 44 .57 .86 to -.27

1960-1967 37 27 .41 .96 to -.23

1970-1977 105 31 .31 .86 to -.83

Source

1960-1967 Morris and Bronson (24)

1970-1977 Geiser (9)

20
Table

2.

Suommy

of

price-quality

relations

by

product

category:

1960-1977. i

Source:

1960-1967

Morris

and

Bronson

(24)
(44%) , while white goods had the stiallest percentage of

significant tests C18%) . The corresponding median rank

correlation coefficients are 0.42 and 0.29 respectively. The

results for brown goods and other major appliances are fairly

similar, while the number of observations for small appliances is

too few for comparison. A comparison of data for white goods

from the 1960-67 to 1970-77 time periods indicates that the

market performance for this product category has declined. There

has been a decline in both the percentage of tests that are

significant (21% to 18%) and the median rank correlation

coefficient (0.38 to 0.29).

4 .

2

Sproles Study ; 1972-74

Sproles (37) used data from both Consumer Reports and

Consumer' s Research Magazine . While the time period was shorter,

the scope of products covered was more extensive thus permitting

an investigation of the impact of product category on pricequality relations

.

Sproles' results are siammarized in Table 3. A total of 135

product tests were analyzed for five product categories. The

variations in the rank correlation coefficients were extensive in

each instance. However, there was a considerable difference in

the percentage of product tests with significant positive pricequality relations. The best market performance on the average

was given by sports equipment (60%)

,

followed by home items

(36%)

,

while the worst market performance was given by tools

(21%) and large appliances (24%)

.

Sproles concludes that an

"objective price-quality relation cannot be generalized across

product and product categories" (37, p. 74). However, he does

not elaborate on the differences between product categories. One

possible explanation for the sports equipment results may be the

expertise of the buyer and/or salesperson. Gieser (9) also found

good market performance for cameras and sewing machines—both

areas where buyers might be more specialized and hence more

expert.

Sproles' results for large appliances are not too dissimilar

from those obtained by Gieser for major appliances. Thus 24

percent of the product tests analyzed by Sproles had positive

significant price-quality relations compared to 27 percent for

Gieser (white goods, brown goods, and other major appliances).

Since large appliances are big-ticket, high-risk items, one would

expect more extensive consumer shopping and search behavior for

such items. Thus the poor price-quality relations obtained in

both studies are somewhat surprising.

22
Table 3. Suiranary of price-quality relations by

product category: 1972-1974.

Product Category

Number

of

Tests

Percentage of

Significant Tests

Rank

Coe

Median

Correlation

fficient

Range

Large appliances 38 24 .29 .86 to - . 56

Small appliances 54 28 .28 .86 to -.66

Home items 14 36 .34 .67 to -.50

Tools 14 21 .31 .85 to -.46

Sports equipment 15 60 . 63 .90 to -.57

Total 135 30 .34 . 90 to - . 66

Source: Sproles (37)

23
4.3 Conclusion

In spite of data, limitations the following general

conclusions may be drawn from the studies by ^lorris and Bronson,

Gieser, and Sproles

:

1) markets for consiamer goods are functioning imperfectly,

21 market performance has not changed greatly within the

past two decades,

3) price-quality relations are characterized by considerable

instability

,

4) price-quality relations for high risk products such as

major appliances reflect an absence of search behavior by

consumers , and

5) some markets have positive price-quality relations

suggesting the existence of expert buyers

.

5. REASONS FOR INFORMATION FAILURES IN THE MARKETPLACE

5 . 1 Background

According to Thorelli (41) several changes have occurred in

the past decades which have increased the complexity of the

consumer decision process and reduced the information

disseminating capability of the' marketplace. Technological

change has resulted in changing product characteristics and the

replacement of existing products by new products. The consumer

can no longer rely on past experience to evaluate products.

There has been a proliferation of models , brands , and products

,

thus increasing the niomber of items for which the consumer must

seek information. In addition, the operation and maintenance of

new products has become more complex.

The increase in scope and complexity of the consumer's

choice set has been accompanied by an increase in mass production

and distribution and ensuing impersonalization in the

marketplace. Personal selling, once an important source of

product information, has diminished in importance in an era of

self-service. Finally, the consumer faces a time constraint in

obtaining the necessary information. According to Linder (20)

the time constraint may be the ultimate constraint in the postindustrial society. As a result the consumer may be less willing

today to search for information, even though the need for

obtaining information has increased.

24
5 . 2 Responses tQ the Inforjnatlon Gap

The inforjnation gap was created by jnajor tech.no logical and

social changes. However, actions by sellers and buyers could

reduce this gap. It is- important, therefore, to consider what

incentives, if any, exist in the current ma,rhet system for

correcting the situation.

Standards are one method for providing product information.

The consumer, in this instance, is provided with the assurance

that the product meets a certain level of performance though he

may be uninformed about the specific product characteristics or

performance levels on which the standard is based. However,

industry opposition to standards was noted as early as 1929 by

the National Industrial Conference Board.

Wherever extensively explicited trade or brand names or

patent rights are involved, standardization has made little

headway. The object of trade and brand names is to build up

good will and lift goods out of competition. The object of

standards or specifications is primarily to eliminate

superficial differences and to center attention on price.

Manufacturers do not want to sacrifice a trade advantage

based on good will secured through the popularization of

trade or brand name by admitting that their product is made

according to a specification followed by the entire trade.

(27, p. 260)

.

Recently Hemenway (12) conducted a survey of voluntary

standards for producer and cons'umer goods and found a lack of

useful voluntary standards for consumer goods . He attributed

this result to lack of organization on the part of consumers

,

since buyers gain from standardization in general while sellers

gain from product differentiation. It has been claimed by

i,ndustry proponents that standards for many consiamer goods are

infeasible and inefficient in view of the diversity of consumer

needs and usages.* Whatever the justification or explanation for

the lack of consumer product standards , their absence places a

heavy burden on other information systems in the marketplace

since most consumer goods markets are characterized by the

existence of inexpert buyers. Scitovsky (35) argues that

manufacturers gain from operating in the inexpert buyers' market,

since price and quality competition is reduced and consumer

reliance on brand name and firm reputation is increased. There

is, therefore, little incentive for oligopolists to reduce

*Minimum performance standards may tend to encourage uniformity

of products, thereby reducing choice based upon quality and

increasing price competition.

25
consiomer ignorance which is the source of their market power and

profits. Scitoysky's viewpoint is repeated in a Fc^ieral Trade

Commission staff study which, notes that "it is difficult to

imagine any circumstance, for example, under which it would be

profitable for the producers of one of the more highly

differentiated consumer products to provide voluntarily its

consumers with information on the actual performance ratings in

the relevant dimensions of their respective offerings"

(6, p. 15) .*

Advertising, which is a major form of nonprice competition

for oligopolists, also faces a conflict between producer and

consumer self-interest. Schmalensee in his review of the role

and effectiveness of advertising concluded that "markets in which

advertising is most effective and hence most intensively employed

are not necessarily those in which the value to consumers of

available information is greatest" C33, p. 86). Schmalensee also

noted that little advertising was "devoted to comparison of

competing products , and when such comparisons are made by sellers

they involve only a few carefully selected dimensions of quality

that might not be most relevant to consumers" (33, p. 86). He

concluded that the current system of seller provided information

results in a mix of information and an emphasis on subjective as

opposed to objective considerations, which would differ if the

information were being provided by a disinterested third party.

The dearth of informative labeling was also noted by an FTC

staff study in 1972.

The consumers ' principal source of product

information, commercial advertisements, have for

the most part been focused less on the objective

performance characteristics of the advertised

products than on the psychological associations

they permit. In short, there is a growing

recognition of the consumer's need for greater

factual information on the products he is asked

to buy and of a duty on the part of the seller to

provide it in a form that will permit the consumer

to exercise an informed choice among competing

products. C6 , p. 3)

The FTC Precis was never officially approved by the Commission. However , the FTC has conducted the investigation of standards and

programs which was recommended in Precis. A

proposed Trade Regulation Rule was issued in December 1978 (7).

26
In some instajices. th,e manufactiare?: may elect to emphasize

the technical aspectsi of the product that is being advertised.

However, Scitovsky watiis that such advertising may be designed to

increase consumer reliance on the firm rather than to facilitate

consumer choice.

Manufacturers are often aware of the fact that

the security of their oligopoly position depends on

and increases with the ignorance of their customers

At least they often pursue an advertising policy

that seems deliberately aimed at impressing the

consiamer with his own ignorance. Hence the stress

in some advertisements on the technical and

chemical complexity of products. ...All such

advertising carries the suggestion that the consiomer,

a mere layman, would be unwise to judge quality

unaided by more inspection, and should rely instead

on the guarantees offered by the reputation of

established manufacturers. (35, p. 52)

While the consumer has the responsibility for obtaining and

processing product information in the marketplace, there are

several problems with respect to such activities. First,

objective information on product characteristics and performance

may be lacking. The cost to the individual consumer to generate

information on his own accord may be prohibitive . Thus

Schmalensee states that there are economies of scale in

infoirmation gathering and dissemination, and that the individual

household, unlike the industrial buyer, cannot purchase "ten

autos or five hundred light bulbs and subject them to extensive

testing" (33, pp. 86-87), Second, the costs of information

processing may be high in view of the technical requirements,

lack of comparable information for different brands , and time

constraints . As a result of both these factors , the consumer may

rely on other strategies for obtaining infoinnation about the

product. Price is frequently used by consumers to judge quality.

However, the major problem with this strategy, as Scitovsky

points out, is that it assumes the layman is operating in an

expert's market and most consumer markets consist of inexpert

buyers. The fact that cons\imers continue to use price as a

measure of quality may reflect the belief that the system is

working , i . e . , there are expert buyers in the market , or a lack

of other types of information (33,34). The second strategy open

to the consumer is to rely on the expert judgment of the

manufacturer or distributor. Thus firm size and reputation serve

as indices of product quality. This also may be an inappropriate

strategy since there is no reason to expect the interests of

buyers and sellers to coincide. In the inexpert buyers' market,

the interests of the sellers dominate. However, there is nothing

in the existing market mechanism which signals consiomption

inefficiency to the inexpert buyer, so the consiomer has no

incentive to change his behavior pattern. Since it is not

27
profitable for the seller to cixange either., it appears that the

current systejn is unlikely to correct in#oriiiati,on failures in the

marketplace

6. SOLUTIONS TO THE PROBLEM

In theory, a market for information should, operate in the

same manner as other markets, so that the amount and price of

information is determined by demand and supply conditions.

However, changing consumption technology and the provision of

"free” information by sellers in the forro of advertising or

personal selling distorts both demand and supply conditions.

Consumers, as Lancaster points out, may be unaware that they are

operating within their efficiency frontier, and the market

mechanism provides no signals of such behavior. Hence, the

demand for information is understated. The availability of

"free” information is also a deterrent to independent

organizations, who must impose a direct charge for information.

In addition to demand and supply deficiencies , the existence

of externalities due to indirect benefits must be considered.

Thus the benefits from product information acquisition include

direct benefits (consumption efficiency) and indirect benefits

(market efficiency and product-quality control) . Indirect

benefits accrue to all consumers but can only be realized if a

sufficient number of consumers are informed. Thus the individual

consumer is likely to discount such benefits since the actions of

one person will have little market effect. Failure to recognize

the indirect benefits from product information by consumers as a

whole will result in a less than optimal level of information in

the marketplace.

Voluntary and mandatory consumer information programs are

discussed in the following sections

6 . 1 Voluntary Information Programs

Voluntary programs include comparative testing, informative

labeling, standards, and quality certification.

6.1.1 Comparative Testing

Comparative testing is conducted by independent

organizations. The organization selects products and brands for

testing and also determines what characteristics should be tested

and the appropriate test methods. Two types of information may

be supplied: specific information concerning major product

characteristics and overall product rating . In the latter

instance the overall rating may be combined with a consideration

of price to indicate the "best buy." One limitation of the

overall rating scheme is that the weights used in obtaining this

28
rating scheme is that the weights use<i in obtaining this rating

are to some extent sxibj ectiye . A different set of weights will

result in changes in product rankings

Examples of comparative testing organizations in the U.S.

are Consiomers Union and Consumers' Research.

6.1.2 Informative Labeling

This program is also based on test methods which describe

performance levels for various product characteristics . The

resulting information is then provided on the product label. In

contrast to comparative testing, there is no overall product

rating. Instead, separate ratings are provided for each product

characteristic leaving the determination of appropriate weights

to the consumer. The determination of relevant product

characteristics and the test procedures for evaluating such

characteristics generally involves participation from a broad

range of interests including business and industry, government,

and consumers.

In theory informative labeling permits the labeling of

different quality products with consumer response indicating what

quality levels are desirable. In practice, however,

manufacturers of low-quality products may not elect to

participate in the program or may upgrade the product line. Such

possibilities may explain the belief by "a significant minority

of consumers" that labels are a type of quality guarantee (42,

p. 102) . Informative labeling should, therefore, be accompanied

by consumer education to prevent possible consumer misuse of

labels

Proponents of informative labeling claim that it provides

for individualized decision-making by consumers since information

is provided on several product characteristics . Informative

labeling also facilitates information processing since the

information content and format is standardized. Thus product

comparisons are facilitated. Opponents of informative labeling

disagree with the information processing claim and argue that

labeling will result in standardized products , and hence a

reduction in consumer choice. However, there is no indication

that this has occurred in Europe when infoinnative labeling was

used (42,43). There seems to be no reason why standardized

information should result in a standardized product. In fact,

the availability of comparable information for different brands

may permit consumers to express their "true" wants to a greater

extent than they do under the current system. If consiamer wants

are similar, then the resulting standardization can only be

beneficial since there will be improvements in production

efficiency. If consumer wants are dissimilar, then manufacturers

will be encouraged to differentiate their products on the basis

of real as opposed to superficial product characteristics (42)

29
An example of informative labeling in the U.S. is

nutritional labeling. This program was developed by the Food and

Drug Administration in collaboration with the food industry in

1971-72. The program is voluntary but provides for mandatory

labeling when nutrients, are added or nutritional claims are made

for products.

6.1.3 Standards

The following definition of a standard was given by Coles,

one of the pioneers in the field of consiamer goods

standardization.

A standard is a physical, written, graphic or

other representation of a product or a procedure

established by authority, custom, or general consent

with which other products or procedures of a like

nature are compared for identification or

measurement or to which they are made to conform.

(5, p. 107)

Coles (5) points out that standards and informative labeling

are closely related. Thus "standards are not effective as a

means of describing goods unless they are used on labels where

consiomers can obtain the information" (5, p. 105). Both

standards and informative labeling are based on standardized test

methods

.

Standards may be voluntary or mandatory and may pertain to

product design or performance. Performance standards according

to Coles offer two major advantages over design standards.

First, they are of greater interest to the consumer who is more

concerned with factors such as durability, efficiency, economy of

operation, and care than product composition. Secondly, they

permit flexibility of response on the part of manufacturers who

are not constrained from using new or different materials in

making products which comply with the standard.

Standards are used in product grading. In the case of

minimum standards , goods are assigned two grades—acceptable and

unacceptable. In other instances several grades may be provided

for a single product category, with products within each grade

possessing "similar though not necessarily identical

characteristics" (.5, p. 137). Grade labeling is then used to

indicate the grade to which the product belongs.

A standard may be used to describe one product

characteristic or several product characteristics. The latter

increases the complexity of the standard setting operation. Much

of the debate concerning voluntary standards for consiimer goods

has focused on the problems in identifying and measuring relevant

product characteristics and in combining several characteristics

30
in a single standard. While informative labeling suffers from

the same problems with respect to identification and measurement

of characteristics, it is not required to. combine these

characteristics. As a result, the determination, of the relative

importance of various product characteristics is left to the

discretion of the consumer.

Problems in establishing "acceptable” standards has been

cited as a major reason for producer opposition to standards.

However, both Scitovsky (351 and Hemenway (12) point out that

seller opposition is also due to their reluctance to sacrifice

the advantages of brand name and firm reputation. While

consumers have perceived the benefits of voluntary standards

,

they have suffered from lack of organization and have hence been

ineffective. As a result of these factors it is not surprising

that Coles' findings concerning the lack of voluntary standards

for consumer goods were repeated by Hemenway fifteen years later

(5,12)

.

6,1.4 Quality Certification

Quality certification is similar in concept to minimum

standards. Thus a product with a quality certificate must meet a

threshold level of performance or materials content. The

threshold level and procedures for establishing products to meet

this level are determined by the certifying agency.

Quality certification provides less information than

informative labeling since the degree to which the threshold is

exceeded is not provided. However, quality certification

provides more information to consumers concerning minimum levels

of performance if all products of a category are submitted for

certification. Products falling below the minimum are not

certified. Quality certification may be combined with

informative labeling if threshold levels of performance are

required for all products carrying informative labeling.

Thorelli notes that there has been considerable debate on this

requirement since it might result in "undue infringement of

consumer as well as producer sovereignty" (42, p. 101). Quality

certification may also be combined with standards by establishing

a threshold level for the lowest quality standard. In instances

where more than one quality mark is used for a single product

category quality certification approaches grade labeling.

Examples of quality certification programs in the U.S. are

those conducted by Good Housekeeping and Parents ' Magazine.

Thorelli cites the following major weaknesses with respect to

these two programs: "the rules of qualification for any given

product are unknown in terms of testing methods used,

characteristics tested and minimum thresholds applied"

(43, p. 455).

31
6.1.5 Warranties and Service Contracts

A final recourse for the uninformed consumer is to rely on

express warranties or service contracts. Express warranties are

written agreements provided by the seller to the buyers that the

product will perform in a satisfactory manner for a certain

period of time or will be repaired or replaced under certain

specified conditions. Express warranties differ from implied

warranties which are based on the common law principle that goods

should perfoimi as expected since such expectation is the basis

for purchase.

Express or written warranties have been frequently

criticized as providing more protection for the seller than the

buyer. The Magnuson-Moss Warranty-Federal Trade Commission

Improvement Act, which was signed into law on January 4, 1975,

focused on improvements in the operation of express warranties

The major provisions of the act are described by McCall as

follows

Basically the Act divides all written

warranties into two categories (Full Warranty or

Limited Warranty), and specifies required labels,

disclosures and terms for such warranties.

Significantly, the Act also empowers the Federal

Trade Commission to make detailed rules to

supplement the provision of the Act. The broad

grants of rule making power to the FTC give it

authority to specify detailed requirements for

the contents of written warranties and to

establish detailed requirements for the

disclosure of terms of written warranties.

Additionally, the Act requires that certain

substantive provisions be included in a written

warranty before it can bear the desirable label,

"Full Warranty." (22, p. 70)

Economic considerations involving the usefulness of

warranties to consumers include costs to consumers and producers

when warranties are broken. If the item is expensive, the

consumer is likely to devote more time and effort in seeking

legal redress than in the case of inexpensive items. The

economic incentive for the manufacturer depends on the degree to

which his market share or reputation is affected by failure to

honor warranties. Thus manufacturers haye more incentive when it

is important to maintain customer patronage or when the customers

are located in a relatively small market area. Infrequently

purchased items , where there is little communication between

buyers, provide less incentive for the manufacturer. Under

certain conditions/ therefore, the integrity of the seller may be

as important as the written warranty.

32
Service contracts, are used by consiimeJTs a,s a protection

against frequent of expensive breaXdowns. However/ the

uninformed buyer is in. the position of purchas.i,ng a servioe whose

need or utility he cannot assess . While service contracts reduce

the risk from product ownership/ the buyer may not know whether

he is paying too little or too’ much for such risk reduction.

Again, there is reliance on the judgment of sellers and, as

Scitovsky warns / it is important to remember for whose benefit

such judgment is exercised. Unnecessary service calls due to

consumer ignorance may also inflate the price of service

contracts. Thus consumer information is necessary if service

contracts are to function effectively in reducing buyer

uncertainty

,

6.1.6 Role of Information Seekers

Voluntary information programs are also likely to be

effective only if there is interest on the part of buyers and

sellers. Buyer interest may be a primary factor since sellers

will tend to respond to their actions. Thorelli (42) has

designated a certain group of cons-umers , infoinnation seekers , as

playing a critical role in the success of voluntary consumer

information programs and hence in the effective operation of the

marketplace. The concept is attractive since information

processing costs are confined to a limited number of consumers

.

However, it is uncertain what is the critical mass of information

seekers in a given market. If information seekers are few in

number and do not influence other consumers by their actions

,

they may have little impact on the marketplace. Data from

Consumer Reports mentioned in section 4 of this study indicate

that "best buys" and "worst buys" continue to be offered for sale

in the U.S. in spite of the increased interest in consumer

information. This suggests that a critical mass of information

seekers, with the exception of certain specialized product

categories, has not yet been reached.

6.2 Mandatory Programs

Mandatory programs include informative labeling and

standards. The latter program encompasses mandatory quality

certification

.

6.2.1 Informative Labeling

Mandatory labeling is generally used when information is

deemed important to the national interest and voluntary programs

are likely to be unsuccessful. Fof example mandatory care

labeling for apparel was initiated by the Federal Trade

Commission in 1972 when the voluntary program proved

unsuccessful. While care labeling is not a performance label per

se, it has an implied guarantee of product performance since the

product should prove satisfactory if the appropriate care

33
procedures are followed. Examples of content or composition

labeling as opposed to performance labeling are given by the Wool

Products Labeling Act of 1939 and the Textile Fiber

Identification Act of 1958. While these labels resulted in the

provision of consumer information in the marketplace, they were

designed primarily to protect manufacturers from product

misrepresentation

.

While mandatory labels are more restrictive than voluntary

labels, they are less restrictive than mandatory standards. Thus

warning labels for cigarettes and saccharine are designed to

alert consumers to potential hazards to health without

restricting consumer choice. In some instances mandatory

labeling may be accompanied by a minimum performance requirement.

The decision to require a threshold level of performance is more

significant for mandatory labeling than for voluntary labeling.

If threshold levels are required, then lower quality products

will be removed from the marketplace resulting in a reduction in

consumer choice.

6.2.2 Mandatory Standards

Mandatory performance standards are frequently advocated in

the areas of safety and health, in particular when consumer

information programs are deemed inadequate to reduce the hazard.

However, since this type of regulation has the most pronounced

impact on consumer choice, consideration should be given to the

cost effectiveness of such regulations. Colantoni, et al.,

comment in their comparison of information and regulation that

"as a benefit, direct control can remove alternatives that some

people should not have chosen. However, it can also eliminate

choices that some consumers should have made, which is a cost"

(4, p. 613)

.

There has been less interest in mandatory standards in other

areas. Thus Rothenberg in his review of the limitations of

consumer sovereignty admitted that "if consumers knew more, knew

better, were cured, were not as gullible, they would regret many

of their present choices" (30, p. 282). However, he argues that

the "right to be often wrong" is more important in our society

than satisfaction of the consumer's "true" wants. Rothenberg

states that the determination and satisfaction of the consumer's

"true" wants is both infeasible and undesirable due to our

existing state of knowledge with respect to consumer behavior and

the threat of centralized decision-making to freedom of choice.

The argument for freedom of choice is based on the economic

theory of consumer behavior in which the individual ' s unique

preference function determines the optimum bundle of goods and

services. While the preference function or the choice set may be

distorted by consumer ignorance and advertising appeals , it is

preferable to correct the causes of such distortions (or even to

34
live with them as Rothenberg believes) than to make decisions for

consumers

6 . 3 Comparison of Voluntary and Mandatory Programs

Seyeral factors must be considered in assessing the relative

merits of voluntary and mandatory programs. First, voluntary

programs are likely to be less expensive since not all producers

are required to participate and there are fewer costs of

administration. Second, voluntary programs permit consumer^

choice in the marketplace between products with different degrees

of information thus permitting feedback to business and

regulators concerning the value of information to consumers

While voluntary programs are likely to encounter fewer problems

with respect to implementation, they may be ineffective due to

consumer inertia or producer opposition. Finally, voluntary and

mandatory programs may be similar with respect to the information

processing requirements since both programs may use a

standardized format.

The following considerations are important for both

voluntary and mandatory programs: 1) product purchase and/or

consumption entails a certain risk with respect to consumer

finances, health, or safety; and 2) information is not available

in the marketplace, or existing information is inadequate to

protect the consumer. Two additional factors are then necessary

for the adoption of mandatory programs. They are 1) voluntary

programs are likely to be unsuccessful and 2) program costs are

less than the direct and indirect program benefits . Both of

these stipulations reflect the fact that mandatory programs are

not subject to the discipline of the marketplace and hence must

be evaluated on criteria other than producer and consumer

response.

Finally the information programs discussed in this section

differ with respect to freedom of choice and consumer information

processing requirements. Unfortunately, the two factors are in

opposition to one another. Thus, voluntary informative labeling

permits the greatest freedom of choice but its information

processing requirements may be considerable. While standards and

quality certification are more restrictive, in particular if they

are mandatory, their information processing requirements are

less. Program selection will thus depend on consumer needs and

capabilities. The diversity of consiamer interests is likely to

require a corresponding diversity in consumer information

programs so that no one program can be expected to solve the

problem of the consumer information gap.

6 . 4 Consumer Protection and Producer Protection

Information labeling, quality certification, and product

standards all involve determination of relevant product

35
and tast mathods for avaluating such

^^^^^ctaristics . Datarminations ara ganarally mada by coirunittaas consisting of raprasantativas from businass and industry,

consumar organizations , and various public and private organizations . If tha coiranittaas ara dominated by large established firms, there is a possibility that their interests

will tend to dominate the decision-making process to the

detriment of the interests of smaller firms or consumers. The

FTC staff report of 1978 concerning standards and certification

contained the following conclusion. "Standards development and

certification organizations have not adequately protected all of

the interests affected by their activities . The procedures are

capable of being, and have been, manipulated by large or

established firms at the expense of consumers, small firms, new

entrants, and others" (7, p. 5). The same staff report also

noted that while private standard development and certification

activities provide benefits , they have also entailed costs to the

consumer. The following examples were cited: "denying consumers

the benefits of superior or lower cost technology, denying

businesses the opportunity to enter and compete in profitable

industries, inadequate product safety levels, inflated product

prices/ deception or nondisclosure of material product

information" (7, p. 3). The proposed Trade Regulation Rule by

the FTC is designed to prevent such outcomes by specifying

certain procedural safeguards for standard development and

certification activities. However, this rule has occasioned

considerable debate with respect to the costs and benefits of its

implementation

.

6 . 5 Economics of Information Provision

6.5.1 Major Issues

Major issues with respect to the provision of consumer

information programs are 1) how much information should be

provided, 2) what is the best mechanism for achieving the desired

level of information, and 3) what is the distribution of program

costs and benefits . The first two issues are interrelated as the

following discussion will show.

Determination of the appropriate level of information

depends on program costs and benefits. Thus an analysis, similar

to that used for consumer information acquisition, is also

relevant here.

The marginal costs and benefits of information provision are

given in Figure 6 . The marginal costs in the case of information

provision are defrayed by both consumers and taxpayers. Thus,

the provision of product information by the private sector will/

in general, incur costs and these costs will be recovered through

subscription fees to consumer magazines or through higher prices.

Public sector programs are paid for by taxpayers. Both private

36
FIGURE 6. COST AND BENEFITS OF INFORMATION PROVISION

37
and public sectors may be involved in a particular program. Irrespective of which sector is involved, the marginal costs of

information provision may be expected to increase as the level of

information increases . Thus the costs of providing consumers

with enough information to become technical experts in a

P^^ticular area may be equivalent to the costs of training and

educating technicians and professionals.

Marginal benefits include both the direct and indirect

benefits from product information. Direct benefits include the

increase in consumption efficiency, while indirect benefits

include improvements in market efficiency and the ability of

manufacturers and consumers to sell and buy products of different

quality. Marginal benefits may be expected to decline as the

level of information increases, again reflecting diminishing

returns of information. While total benefits will increase with

the level of information, they will increase at a decreasing

rate.* The optimum level of information is given by point a in

Figure 6. At this point the marginal costs of information

provision are equal to the marginal benefits

.

Mechanisms to achieve the desired level of consumer

information include voluntary or mandatory information programs

discussed in Sections 6.1 and 6.2. Three major considerations in

the development of such programs are adequacy, efficiency, and

feasibility.

The first consideration, program adequacy, is concerned with

the degree to which the program can . increase the level of

consumer information. The program may be inadequate with respect

to both the type of information and its availability. Too little

information may bias the consumer by focusing attention on

certain product characteristics to the exclusion of others.

Comparable information for different products may also be

unavailable. Advertising has frequently been cited for the above

two inadequacies. Too much information, in turn, may result in

information overload and limited use of information by consumers

(16,31,40,45,46). Thus the attempt by the average consumer to

use nutritional labeling to prepare the most nutritious meals for

the lowest cost could easily result in information overload since

the processing requirements are extensive. Experts are

frequently responsible for the creation of information overload

since they readily perceive the dangers of too little

information. While the resulting program may be adequate with

respect to content, high processing costs may mean that the

information is never used, i.e., the marginal cost curve in

*The assumption of diminishing marginal benefits throuahout is made for purposes of simplicity. Marginal benefits may increase

initially as noted earlier with respect to Figure 5.
Figure 6 would intersect the marginal benefit curve to the left

of the vertical axis

Information should also be available when and where the

consumer is likely to use it, as is the case with point-of-sale

information. A considerable amount of consumer information

literature is never used because it is provided in the wrong

place at the wrong time. Unused information incurs a cost and is

unlikely to generate many benefits for either the consumer or

society as a whole. While some benefits may exist with respect

to the consumer's perception of the marketplace and/or the

competitive response of sellers, unused information will

influence neither the consumer's efficiency frontier nor replace

an inexpert buyers' market by an expert buyers' market.

As shown in Figure 6 , unused information means that the

realized marginal benefit curve (MB') differs from the

anticipated marginal benefits (MB) . Under such circumstances a

level of information given by Lj^ is optimum. However, failure to

recognize the divergence between actual and anticipated marginal

benefits will result in mis-allocation of resources. The

increase in the level of information from to entails an

additional cost equal to Lj^baL^ which exceeds the additional

benefits given by Lj^bdLg.

While adequacy affects the marginal benefit curve,

efficiency affects the marginal cost curve. The more efficient

the information program, the lower the marginal cost curve and

the greater the optimum level of information. Thus a shift in

the marginal cost curve from MC to MC ' will result in an increase

in the optimum level of information from to L^. The marginal

cost curve may change for several reasons , notably the generation

and dissemination of information by the party or parties in the

best position to do so. Thus, the consumer's own experience is

an efficient mechanism for generating information concerning

inexpensive, frequently purchased products. In other instances

it is more efficient for information to be provided by

organizations (either private or public) in view of the economies

of scale in information collection and dissemination. Both

operations need not be performed by the same organization. Thus,

retailers are likely to be in the most favorable position for

disseminating information in view of access to customers at the

point of sale. However, they may not be the most efficient

collectors of information.

Feasibility, the final consideration for developing consumer

information program, is perhaps the most important since it

determines both the program and the program sponsor. Feasibility

does not pertain to program costs which have already been

considered under the efficiency criterion and the necessity for

equating program costs and benefits. Feasibility pertains to the

ability to initiate and operate a particular program due to

39
seller or buyer response. For example, consumer interest in a

voluntary program may be low, thus discouraging participation by

manufacturers. Seller response to a voluntary program may also

be negative due to several factors. There may be problems in

selecting relevant product characteristics and in identifying

suitable test methods . A second constraint is the impact of

product information on the market power of established producers

(6, 35). If firms perceive that the provision of product

information is detrimental to their self-interests, then they are

unlikely to participate.

Feasibility is closely related to the major issue in the

provision of consumer information programs —the distribution of

costs and benefits. While allocation of costs and benefits is

not considered in cost-benefit analysis , such allocations may be

important to the policy maker in securing support for a program,

either voluntary or mandatory. Provision of information by

either the private or public sector will incur costs which may be

defrayed by non-recipients or non-beneficiaries of the

information. For example, taxpayers may defray the cost of a

specific product information program even though they do not use

the product. Similarly, product information may not be used by

all product purchasers, e.g., textile care labeling, nutritional

labeling. The differential distribution of costs and benefits

may create a problem in the area of consumer information.

Proponents of such programs are generally the more affluent and

better educated segments of society who are willing to pay for

the information and are able to use it. Unless the information

seekers are perceived as benefiting other consumers indirectly,

i.e., through a more efficient market system, then information

programs will be perceived as inequitable or unnecessary and may

eventually be disbanded as the silent majority finds its voice.

Communication of the importance of information in the efficient

operation of the marketplace may be essential, therefore, in

obtaining support for programs

.

A more serious area of conflict is that between established

producers and consumers . The indirect benefits from product

information (more competitive markets and product quality

control) may be detrimental to the interests of certain

producers. The divergence between producer and consumer

interests may be a major reason underlying the consumer

information gap.

6.5.2 Conclusion

The existence of information failures in the marketplace is

receiving increasing attention by various public and private

organizations. It has been argued in defense of the existing

information system that consumers already have all the

information that they need and frequently more than they can use.

However, this argument neglects the reasons for consumer failure

40
to use existing information. The fault may lie not with

consumers but rather with the availability, content, and ease of

use of the information supplied. The solution is not more of the

same but a determination of the type of information which is

needed. Since experience is the most adequate and efficient

method for providing information for many consumer products,

attention should be centered on those products where information

is important to consumers, i.e., expensive, infrequently

purchased products. Consideration should be given to the

availability and adequacy of existing information in selecting

products for information programs.

The continuation of the consiamer information gap affects not

only consumer welfare but the economy as a whole. Information is

an essential element in the efficient performance of the free

market system. Failure to provide adequate infoimiation threatens

not only the performance of the system but also the system itself

since intervention may occur to correct the deficiency, e.g.,

mandatory standards and certification. The divergence between consumer

and producer interests is, in part, responsible for the perpetuation

of the consumer information gap. While such a divergence may be

expected to continue, the information gap may be reduced eventually

as both parties recognize their mutual interest in the free market

system.

41
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45
iI
NBS-114A (REV. 9-78)

U.S. DEPT. OF COMM.

BIBLIOGRAPHIC DATA

SHEET

1. PUBLICATION OR REPORT NO. NBSIR 80-2016 ^

' ' -

3. Reeiptentf & AcC6$&io» Mo.

4. TITLE AND SUBTITLE

The Economics of Consumer Product Information

5. Publication Date MAY 1980

6. Fefforming Organization Code

7. AUTHOR(S)

Rachel Dairdis

8. Performing Organ. Report No. 7610114

9. PERFORMING ORGANIZATION NAME AND ADDRESS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, DC 20234

11. Contract/Grant No. P.O. #713674

12. SPONSORING ORGANIZATION NAME AND COMPLETE ADDRESS fSfreet, City, st^te, ZIP)

Same as item 9

13. Type of Report & Period Covered Final

Agency Code

15. SUPPLEMENTARY NOTES

I

i Document describes a computer program; SF-185, FIPS Software Summary, is attached.

16. ABSTRACT (A 200^word or leas (actual summary of most significant information. If document includes a significant bibliography or

literature survey, mention it here.) The major objective of this study was to examine the economic

principles underlying the provision and acquisition of consumer

product information. The direct and indirect benefits from

product- information and the economics of consumer information

acquisition comprise the first part of the study. The existence

of the consumer information gap within the past two decades is

investigated in the second part of the study. Reasons for

information failures in the m.arketplace are then examined leading

to a discussion of various methods for increasing the level of

consum.er product information. The analysis should provide an

understanding of reasons for information failures in the marketplace

and problems faced by policy makers in attempting to correct market

deficiencies

17, KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name;

separated by semicolons)

Consumer; benefits; information; label; product; testing

18. AVAILABILITY Unlimited 19. SECURITY CLASS 21. NO. OF

(THIS REPORT) PRINTED PAGES

i ] For Official Distribution. Do Not Release to NTIS UNCLASSIFIED 55

1 Order From Sup. of Doc., U.S. Government Printing Office, Washington, DC

20402, SD Stock No. SN003-003-

20. SECURITY CLASS

(THIS PAGE)

22. Price

Order From National Technical Information Service (NTIS), Springfield,

VA. 22161 UNCLASSIFIED $7.00

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