Three Essays on the Effects of Consumer Protection Policy on Market Competition
Creators: name: Bird, Davina
Publisher: name: University of Lincoln
Year: 2023
Subjects: L100 - Economics
L113 - Economic policy
L120 - Microeconomics

description: Consumer protection is a natural complement to competition and is receiving increasing attention by both academics and regulators. There are also potential tensions where a focus on consumer protection can worsen competition or vise versa. In particular, the effects of consumer protection policies on competition requires more research. By focusing on the specific consumer protection policy of mandated refunds, this thesis provides three theoretical essays to better understand potential unintended policy effects. Using methodologies from applied game theory, industrial organization and behavioral economics, this research investigates how allowing consumers to correct decisions post-purchase via a mandatory refund policy affects their ability to obtain preferred outcomes pre-purchase. The first essay provides a general theoretical model to understand conditions under which there is a role for a mandatory refund policy. The policy effects on firms and society are evaluated when consumers are economically rational. This essay then analyses how these effects change once consumers are allowed to exhibit a well-documented behavioral bias. As consistent with conventional wisdom, a mandated refund policy helps consumers in an imperfectly competitive market. However, we find that there are efficiency trade-offs such that while consumers benefit as a result of a mandatory refund policy, this coincides with a decline in the expected welfare of society, which is only exacerbated by the presence of biased consumers.The second essay analyses the impact of a mandatory refund policy in markets for optional add-ons — that is, complementary products which can be purchased with a “base” good. Such markets have attracted a lot of policy attention and include payment protection insurance (PPI) and extended warranties. However, competition is more complex in these markets and little is known about the effects of policy interventions given competition in these add-on markets differs to normal. We show that there exist conditions under which the beneficial consumer protection effect of a mandatory refund policy for an add-on with respect to consumer surplus is outweighed by a detrimental dampening of competition for the base good, which leads to higher prices for both the base-good and add-on. The third essay analyses how allowing consumers to correct their decisions post-purchase can have adverse effects on competition by changing the pre-purchase advertising behavior of firms, which subsequently will impact a consumer's decision of which firm to visit. The overall impact of the post-purchase mandatory refund policy depends on the level of advertising costs. For sufficiently low advertising costs, we find that a mandatory refund policy can have an adverse effect on competition due to it discouraging firms from providing consumers with information about prices via advertising. For sufficiently high advertising costs, firms do not advertise regardless of the policy intervention, but the harm to firms' profit from the increased returns outweighs the gain to consumers of the return option with a full refund.