The Curious Case of Competition and Quality

I. INTRODUCTION

A central mantra of competition policy is that competitive market forces, besides lowering prices, can increase efficiency, product quality, the level of services, the number of choices and, ultimately, consumers’ welfare. Indeed, the antitrust community generally accepts a relationship between greater competition and lower prices and uses the latter as the prime metric in assessing competitive behaviour and the effects on consumer welfare. Alongside the consideration of price, competition authorities recognize that quality can be as, if not more, important in some markets.

But as competition authorities also recognize, identifying which dimensions of competition are important to consumers is difficult. Even when relevant dimensions of quality are identified, measuring them represents additional challenges.

To circumvent these challenges, competition authorities rely on several heuristics when assessing a merger’s, cartel’s or monopolistic restraint’s impact on quality. One heuristic is that more competition will generally increase quality for a given price or reduce price for a given level of quality. A second heuristic is that when prices and quality vary, consumers will weigh the offerings using an internal price–quality metric. Price adjusts for quality, and consumers rely on the heuristic ‘you get what you pay for’. Often, these heuristics work well for the competition authorities.

However, at times, market realities are more complex and these heuristics fail to reflect the relationship between competition and quality. In this article we focus on these instances, in which the positive correlation between competition and quality breaks down. We explore two necessary, (but not sufficient) variables affecting that correlation. The first relates to the consumers’ limited ability to accurately assess quality differences. The second concerns imperfect information flows that make it difficult or costly to convey to consumers the products’ or services’ inherent quality differences. With these variables in mind, we consider instances in which an increase in competition will not increase quality (when one would expect it should) and in which competition is inversely correlated with quality, and its increase would lead to quality degradation.

Importantly, we do not posit a normative argument: namely that consumers are choosing poor quality goods and services (eg reality television shows) when they should be demanding higher quality fare (eg investigative news programs). Nor do we posit a social welfare argument, namely competition involving status goods (where price may correlate more with conspicuous consumption than quality), which increases envy to the detriment of overall well-being. Nor do we discuss markets, such as health care in the USA, where there may be a ‘non-optimal overemphasis of quality’.¹ Our assumption here is that while different customers have different desires and seek a range of quality, many customers for certain goods and services desire a similar specific dimension of quality. Our focus is on the ability of the competitive process to deliver that desired quality attribute.

II. THE SIGNIFICANT, YET ILLUSIVE NATURE OF QUALITY

Quality forms a fundamental aspect of competition. Competition agencies acknowledge that it is a ‘key non-price consideration that determines whether consumers will purchase a product’.² That significance was echoed by competition agencies that took part in the Organisation for Economic Co-operation and Development (OECD)’s 2013 roundtable on the role and measurement of quality. Participating jurisdictions agreed that quality drives innovation and economic growth and that a decrease in quality can be just as harmful to consumers (if not more harmful, given health and safety concerns) as a price increase.³ Subsequently, maintaining and improving quality forms an important objective for competition policy.⁴

While important, however, quality is an elusive target for competition agencies. Since quality is often multidimensional, with both objective and subjective components,⁵ it can be a relative concept: what one person desires, another can dismiss or revile.

Identifying quality is, therefore, challenging. One metric is to divide quality components along vertical (where all consumers recognize that component as valuable) and horizontal (where consumers disagree over the component’s desirability or value) dimensions.⁶ This too is inexact. Consumers may have different rankings of the vertical components (such as some preferring faster food delivery over perhaps taste). Thus, a ‘single exhaustive definition of quality is a challenging endeavor’.⁷

Another problem concerns measuring the highly ranked vertical quality dimensions. Whereas price comparison (absent price shrouding) provides a transparent and consistent benchmark, quality assessment can be complex and subjective.⁸ At times, competition authorities can see how market participants ‘define, measure, and assess quality in the ordinary course of business’ or see whether the academic and popular economics ‘reveal useful measures of quality’.⁹ But for many products, quality attributes may be difficult to measure objectively.¹⁰ As the European Commission noted:

[E]ven if some quality-related features are measurable, the overall perception of the products’ quality is often based on a combination of several features. If one were to take cars as an example, the number of measurable variables at which customers may look when assessing the quality is immense and very complex, ranging from speed, acceleration, emissions, consumption to precise parameters of the individual components. The assessment of quality is thus often a complex and imprecise exercise in itself, and involves the balancing of evidence which is often of subjective nature such as different perception of customers.¹¹

Identifying the highly ranked vertical dimensions of quality is inherently difficult. Even where many consumers rank a quality attribute highly along a vertical dimension, objectively assessing and measuring quality can be challenging and often imprecise.

At times, for some industries such as health care, competition authorities rely on accepted measurements of quality.¹² Indeed, as the USA noted, ‘the development of quantitative metrics for measuring different aspects of hospital quality (e.g., mortality, complications) is now a well-developed discipline’.¹³

Many industries do not lend themselves to well-accepted quality metrics that can be analysed quantitatively and objectively.¹⁴ In such industries, competition authorities often avoid assessing these differentiated goods and services in terms of the impact that a restraint has on quality.¹⁵ Nor do they typically assess consumers’ response to a small but significant non-transitory decrease in product quality (a ‘SSNDQ’ test).¹⁶ The enforcement challenge of accurately identifying and measuring quality has led competition agencies to rely on two heuristics.

The first heuristic is that ‘[m]ore competition will generally increase quality for a given price or reduce price for a given level of quality.’¹⁷ The Mexican competition authority has, for example, noted that:

Starting from less than perfect competition, more competition generally implies higher quality. Under strong competition, prices, quantities, quality, variety, costs, and innovation should be at their efficient levels, reflecting efficient tradeoffs. Market failure or a non-competitive market structure may imply that those parameters are not necessarily at their efficient levels. The strategic variables, and the ways firms react to each other in the industry will have an important effect on the observed market outcomes.¹⁸

This correlation suggests that a restraint, in substantially lessening competition, would cause quality to deviate below levels that consumers would otherwise prefer. On that point, the US competition authorities have observed how ‘[i]t has long been recognised under U.S. antitrust law that quality is among the attributes of a product or service that typically benefits from competition’ and how the ‘Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services.’¹⁹

The second heuristic is to assume that when prices and quality vary, consumers will weigh the offerings using an internal price–quality metric.²⁰ Some consumers, for example, will judge the price savings to be greater than the incremental quality gain—for example, the traveller willing to sacrifice the better quality food and service of first class travel for a cheaper airplane ticket.

While competition agencies may find it difficult to accurately identify and objectively measure widespread quality dimensions, they are well positioned to safeguard quality from being undermined by relying on these two rules of thumb.

Accordingly, in many markets, the agencies assume a positive correlation between competition and quality and a customer’s ability to appraise quality. As the competitive pressure increases, agents are motivated, among other things, to enhance the quality of their products or service. On the contrary, reduced competitive pressure is likely to reduce product quality. To illustrate, note for example, BAA v Competition Commission where anaemic competition was held to primarily harm quality of service rather than price.²¹ In that case the UK’s Competition Commission ordered the sale of an airport to stimulate service quality competition between airport operators in the London area.²²

In the same vein, a reduction in competition via an increase in market power is often assumed to reduce quality. Indeed, in the area of merger control the US and EU competition authorities in their policy statements recognize that an increase in market power can yield higher prices and lower quality.²³ Consistent with the policy announcements, recent enforcement activity involving mergers has recognized the importance of quality.²⁴ The competition authorities often focus on price competition, but occasionally analyse whether the merger may reduce quality.²⁵ But even here, when analysing whether a merger may substantially lessen competition or tend to create a monopoly, the competition authorities focus on the merger’s likely effect on prices in the short term. In effect, the agency applies the heuristic that the merger, in decreasing competition, will likely raise price and reduce the quality levels.

This heuristic, however, fails when the product or service has been traditionally offered for free, and many consumers are unwilling to pay for it. When the competition authority evaluates these free goods and services (often in two-sided markets), quality is typically the most important dimension of competition for consumers.²⁶ An example of this is the free instant messaging and voice and video calls that consumers use on their tablets, computers, or smartphones.²⁷ Since the products are mainly offered for free, the European Commission found that consumers ‘pay more attention to other features’ and quality ‘is therefore a significant parameter of competition’.²⁸ But even here, the competition authorities infrequently seek to identify specific quality dimensions, assess the consumer response to a SSNDQ and measure how the merger will be likely to impact this dimension of quality.²⁹ For some industries, like commercial radio, the US Department of Justice, for example, considered the mergers’ economic impact solely with respect to advertisers and the rates they paid. The Department of Justice's (DOJ’s) radio merger consent decrees never addressed the mergers’ impact on the free side of the market, such as programming quality, listener choice, or the likely impact of these mergers on the marketplace of ideas. This was a mistake. The ensuing wave of radio mergers in the USA adversely impacted programming quality and programming choices for listeners, and the industry concentration led to higher advertising rates.³⁰ Typically the authority—when assessing the merging parties’ incentives to degrade quality for the free product—assumes that consumers could detect the degradation in quality and would want to switch to rival products or services.³¹

This rationale is also evident when competition authorities analyse exclusionary and predatory practices by a dominant undertaking. The competition authorities recognize that the exclusionary behaviour of monopolies can adversely affect quality levels.³² One example is the European Commission’s Guidance Paper on the Application of Article 102 of the Treaty on the Functioning of the European Union (TFEU) to exclusionary abuse. There, the Commission notes that it:

will focus on those types of conduct that are most harmful to consumers. Consumers benefit from competition through lower prices, better quality and a wider choice of new or improved goods and services. The Commission, therefore, will direct its enforcement to ensuring that markets function properly and that consumers benefit from the efficiency and productivity which result from effective competition between undertakings.³³

The Commission adds that the aim of its enforcement activity:

in relation to exclusionary conduct is to ensure that dominant undertakings do not impair effective competition by foreclosing their competitors in an anti-competitive way, thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would have otherwise prevailed or in some other form such as limiting quality or reducing consumer choice.³⁴

Lastly, it is worth noting the hard line taken by competition agencies against horizontal agreements to limit quality: ‘[c]o-ordinated efforts between competitors to limit quality improvements or to degrade existing quality are generally most appropriately treated as equivalent to a cartel.’³⁵

Exceptions such as industry standard setting, product standardizations, and safety codes do exist. However, competitors generally cannot justify their agreement to curtail competition along one important of dimension (namely quality), on the grounds that they still compete along other dimensions (such as price). The response, under the agency’s rule of thumb, is that consumers, not competitors, should make this price–quality trade-off.

In some instances, competition policy recognizes the possibility that some restriction of competition may facilitate investment in services and quality. In the context of vertical agreements, for example, some restrictions on distribution, selective and exclusive vertical agreements³⁶ or resale price maintenance³⁷ may prevent freeriding and may, therefore, be permitted.

III. CONSUMERS’ ABILITY TO ASSESS QUALITY

Section II reviews how competition authorities generally treat quality considerations in their analysis. Competition agencies regard quality as a significant factor, but have difficulties measuring and appraising it. Subsequently, they often do not attempt to quantify how the challenged restraint will impact quality; instead, they rely on the two heuristics discussed above.

In this section we consider consumers’ ability to appraise quality. We illustrate how, at times, the agencies’ heuristics may not reflect market reality.

As the Australian competition authorities have explained, in competitive markets with rational, well-informed consumers, price can signal quality differences and enable consumers to trade-off between higher price and higher quality.³⁸ In such markets, the heuristics work well: quality is positively correlated with competition, and well-informed rational consumers will choose from the offerings the closest match to their desired price/quality mix.

We begin with rational consumers with willpower and discuss several cases where this positive correlation between competition and quality breaks down. Critical in our analysis are industry characteristics. We identify two necessary conditions: first, it is prohibitively expensive or difficult to convey to consumers the inherent quality differences in the product offerings; and secondly, consumers’ ability to accurately assess quality differences is limited.

Thus, the problem is unlikely to arise with ‘search goods’, ‘whose quality consumers can inspect and investigate before purchase’.³⁹ The correlation between competition and quality is more likely to break down with ‘experience goods’, whose quality consumers may evaluate only after purchase and consumption, and ‘credence goods’, whose quality consumers generally cannot evaluate.⁴⁰ The correlation between price and quality relies, to a large extent, on the satisfactory functioning of the markets, which in turn, to a large extent, relies on an adequate flow of information from producers to consumers and between customers. Indeed, information flow has long been recognized as one of the pillars that support competitive markets and a valuable attribute of consumer welfare.⁴¹

Advertising and information flow

It is generally expected that the flow of information through price and non-price advertising will assist consumers in making better choices in relation to the purchase of goods and services by identifying sellers, providing terms of sales, and information on products, their quality, characteristics, and price. This freedom of choice facilitates competition by widening the range of known substitutes that consumers take into account, as well as their price sensitivity.

The flow of information increases market transparency and makes it easier for consumers to compare the quality and prices of advertised goods between outlets, thus making it harder for retailers to exercise market power by increasing the price or degrading the quality of the advertised goods.⁴² In this respect, advertising, being the most visible way through which companies communicate their products’ and services’ price and quality, can make markets more competitive and efficient.⁴³

Deception⁴⁴ does not occur in perfectly competitive markets which have transparent prices, highly elastic demand curves, easy entry and exit, and perfectly informed, profit-maximizing buyers and sellers who are so numerous that each can act as a price-taker. Likewise, in a perfectly competitive marketplace of ideas, truth quickly and costlessly prevails through ‘the widest possible dissemination of information from diverse and antagonistic sources’.⁴⁵

In many markets, competition is imperfect to begin with. Market dynamics are less formidable. Buyers are unable to detect and punish the misleading firm; inaccuracies remain unexposed. At times, however, advertising might inaccurately depict the product characteristics and quality. It is worth noting that the common law does not recognize a claim for fraud where the defect is obvious to one’s senses.⁴⁶ Consumers can, at times, discover and swiftly punish such deceptive (illegal or legal) claims of quality.⁴⁷ A web-based selling platform provides a good illustration. Web and consumer forums may limit the one-sided freedom of advertisers. When customers’ reviews are available online, the real quality of product or service is easier to determine. While information may be subjected to manipulation—by producers, sellers and competitors—a large volume of financially disinterested reviews may correct such anomalies. In other instances consumers may play a role in exposing the truth.

But in many markets, it is time consuming and costly to verify (if one could) every material statement’s trustworthiness independently. The marketplace of ideas, even in industries with marketing-savvy competitors, does not always expose deception.⁴⁸ Consequently, deceptive and misleading advertising requires two important deviations from the competitive ideal: (i) falsity is not quickly exposed in the marketplace of ideas and (ii) competition is not effectively based on the merits.

In some markets, the enforcement agency can detect some breaches. One example is Intel’s deception that caused the public to believe its competitor’s sluggish performance was due to poor quality (rather than Intel’s mischief). The FTC alleged that Intel introduced compiler features that ‘effectively slowed the performance of software written using Intel’s compilers’ on competing non-Intel central processing units (CPUs). Intel’s deception, the FTC alleged, caused ‘the unknowing public, [original equipment manufacturers] OEMs, and software vendors’ to believe that ‘the slower performance of non-Intel-based computers when running certain software applications’ was attributable to ‘the performance of non-Intel CPUs’.⁴⁹ Intel, the FTC alleged, ‘intentionally misrepresented the cause of the performance differences and whether it could be solved’.⁵⁰ Not only did Intel help maintain its monopoly through its deception, but also its deception ‘distorted the competitive dynamic and harmed consumers’.⁵¹

However, at times, communications may fall below the illegal ‘deception’ threshold while still portraying an inaccurate image of a product and its quality. One example is the variety of misleading food-labelling standards in the USA. Consumers rely on labels such as ‘organic’ and ‘USDA inspected and passed’ to indicate that food is safe, when these labels do not guarantee food safety.⁵² Similarly, investors rely on credit rating agencies to assess the risk of financial products, but an issuer of financial products will only advertise the most favourable risk assessment. ‘Thus, the market may see an opinion that is scrupulously honest but is still an outlier.’⁵³

At times, the natural exercise of market powers may ‘correct’ such distorted flows of information. This may be the case when other competitors engage in counter advertising or lobbying campaigns and expose the truth about the product or service. For example, Texas-based rival HEB exposed US retailer Wal-Mart’s deceptive cost-saving claims.⁵⁴

However, without clear benchmarks for quality, advertising and marketing may promote an illusion of quality. Asymmetric information as to the true quality of various products and services provides an easy forum for inaccurate signals, which are difficult for customers to decipher when comparing and contrasting quality with price. With significant informational asymmetries, misleading and deceptive advertising can distort competition. Consumers cannot easily and accurately assess quality and price. Their search costs in choosing quality products increase. The transaction costs for honest sellers increase in seeking to differentiate their higher quality products and to reap the financial, reputation-related rewards associated with their products. Other strategies may raise rivals’ costs (in having to respond to a competitor’s deceptive statements), create market distortions, and impose a deadweight welfare loss as consumers forgo or minimize purchases of better quality products that, absent the deception, they would have purchased. In addition, the exploitation of network effects, the increase of entry barriers for new products (whose qualities and risks cannot be quickly assessed) and the foreclosure of markets to new services⁵⁵ may undermine competition on quality.

Consequently, competition authorities should exercise caution when applying their two heuristics in markets characterized by false advertising claims. When consumers act with incomplete knowledge, and it is prohibitively expensive or difficult to convey to consumers the products’ inherent quality differences, then one cannot assume that more competition will necessarily improve the price–quality mix.

Reassuringly expensive

Many products and services are differentiated by price and quality. Absent other readily available information on quality, consumers will often rely on a product’s or service’s price as a proxy for quality. Consumers basically rely on the heuristic, ‘You get what you pay for.’⁵⁶ In assuming that quality is positively correlated with price, consumers believe that market forces generally will expose inferior products at inflated prices. Thus, as the Australian competition authority explained, in competitive markets with rational, well-informed consumers, price can signal quality differences and enable consumers to trade-off between price and higher quality.⁵⁷

At times, price accurately reflects quality. One does indeed get what one pays for. Sometimes, however, the correlation is weaker.⁵⁸ When quality is subjective or difficult to assess, consumers may believe that price positively relates to quality, even when it does not. As the European Commission has recognized,

In some cases, the (perceived) quality correlates with price positioning of a given product or service. The more customers perceive the products as being of high quality (by way of its proper characteristics or by marketing), the more they are willing to pay for it and the more the observed prices of the given products differ. Such vertical differentiation may help to define a group of products which are positioned at a similar level and which compete against each other, and which customers still regard as substitutes. For example, price levels can be indicative of the (perceived) quality positioning of brands (in the watches example, luxury watches are several times more expensive than technically comparable ‘regular’ watch brands).⁵⁹

Consumers, for example, may perceive Clorox bleach of better quality since it costs more than the chemically indistinguishable, but cheaper private label bleach.⁶⁰ Clorox invested millions of dollars in promoting its brand of bleach, and often charged a higher price for its bleach.

This price-perceived quality relationship is further complicated if consumers subjectively believe that the higher priced good is indeed better. The higher price affects the experience the consumers feel from the otherwise regular product. Several behavioural experiments have revealed the power of higher prices.⁶¹ In one experiment, nearly all the participants reported less pain after taking a placebo priced at $2.50 per dose; when the placebo was discounted to $0.10 per dose, only half of the participants experienced less pain.⁶² Similarly, MIT students who paid regular price for the ‘SoBe Adrenaline Rush’ beverage reported less fatigue than the students who paid one-third of regular price for the same drink.⁶³ SoBe Adrenaline Rush beverage was next promoted as energy for the students’ mind; students, after drinking the placebo, had to solve as many word puzzles as possible within 30 minutes. Students who paid regular price for the drink got on average nine correct responses. Students who paid a discounted price for the same drink got on average 6.5 questions right.⁶⁴

Similarly, according to researchers at the Stanford Graduate School of Business and the California Institute of Technology:

[I]f a person is told he or she is tasting two different wines—and that one costs $5 and the other $45 when they are, in fact, the same wine—the part of the brain that experiences pleasure will become more active when the drinker thinks he or she is enjoying the more expensive vintage.⁶⁵

Here too, we see in these markets the two necessary conditions: consumers act with incomplete knowledge, and conveying to consumers the products’ inherent quality differences is prohibitively expensive or difficult.

Companies recognize that neither they nor their competitors can easily or inexpensively convey to consumers the inherent quality differences in their and their competitors’ product offerings. The producers also recognize that consumers may rely on price as a proxy of quality (ie you get what you pay for) and cannot independently assess differences in the products’ quality. Thus, companies may charge a higher price to signal superior quality that their product may or may not necessarily have. A drug manufacturer may not want its drug priced lower than other pills (which might signal inferior quality). Customers may report a better experience due to higher prices (rather than the pill’s superior attributes) thus incentivizing producers to charge higher prices. Indeed, quality will not necessarily correlate with competition. This is not deception per se, but the producers manipulating a consumer heuristic of associating price with quality.

* * *

As discussed in Section II, the agencies’ two heuristics assume that rational consumers with willpower will understand price to signal quality differences and will trade-off between lower priced, lower quality goods and higher quality, higher priced goods. This section, however, has provided two scenarios that illustrate that even with rational consumers with willpower, price will not necessarily positively correlate with quality. The link between price and quality is, therefore, more complex than one might expect. Quality and price at times are positively correlated, whereby higher price signals better quality. Informational asymmetries, however, can limit the consumer’s ability to determine the level of quality based on price and thereby limit quality competition. The above discussion highlights that consumers may not always respond as the agencies expect—not because of an unforeseen bias or heuristic but rather because of the information landscape in which consumers operate and their ability to analyse and decode that information. As hinted above, this vagueness affects the ability of not only consumers, but also the competition agencies to examine in detail and balance quality and consumer welfare. In the next section, we flip the coin to consider how market realities affect the producer’s or service provider’s incentive to invest in quality, especially when consumer biases, heuristics and imperfect willpower hinder their ability to assess quality.

IV. PRODUCERS’ LIMITED INVESTMENT IN QUALITY

This section considers the ways in which market reality may affect the producer’s or service provider’s incentive to invest in quality. Again, we see in these markets the two necessary, but not sufficient, conditions—consumers acting with incomplete knowledge, and producers finding it unprofitable or difficult to convey to consumers the products’ inherent quality differences.

In these markets, we consider how information difficulties, externalities, market conditions, or collusion may undermine firms’ incentive to invest in quality. Interestingly, in some cases, firms may underinvest in quality despite seemingly competitive market conditions or price competition.

Communication imperfections

Section IIIA considered instances where through marketing, advertising, and other promotions, consumers cannot easily and accurately differentiate between products and services according to actual quality dimensions. Naturally, these limitations affect not only consumers, but also the producers’ and service providers’ incentive to invest in quality.

A disincentive to invest in quality may emerge, where the quality information is inherently difficult to convey and the consumer’s ability to determine the level of quality is limited. This will especially be the case when important vertical quality dimensions are not readily quantifiable, and firms cannot afford, due to significant competitive pressure, to invest in educating consumers of their products’ quality improvement.

When customers lack the knowledge and expertise to assess product quality accurately, firms may not be rewarded for improving quality. As competition authorities recognize, ‘higher quality does not attract consumers under the conditions of significant information asymmetry between the seller and the buyer in respect of consumer properties of the goods’.⁶⁶ The UK’s competition authorities have observed that:

Buyers may not know, for example, how quality varies across brands. Markets where customers may be unsure about quality include those for professional services, used goods and complex mechanical or electronic products. When, as a result of information asymmetries, customers are unable to form an accurate assessment of product quality (eg if they consistently underestimate the probability of product failure), a market may operate inefficiently. Imperfect information about quality can be a particularly severe problem for infrequently purchased goods or goods the quality of which cannot be verified even after purchase – so-called ‘credence’ goods.⁶⁷

We can return to our Intel example. In its decision, the European Commission observed in the market for CPUs how:

[a]ccording to a recent market survey, price is by far the most important factor when choosing a computer at retail level … Quality and therefore also CPU awareness play a secondary role, in particular because consumers tend to lack the respective technical knowledge to develop a preference for Intel or [its competitor’s] CPUs.⁶⁸

David Evans has discussed how this phenomenon, sometimes known as the ‘lemons problem’, caused the US videogame market to collapse:

Consumers could not distinguish low quality from high quality games before buying them. Producers therefore had incentives to create cheaper low quality games that drove the high quality games out of the market. But consumers did not want to buy video game consoles to run low quality games.⁶⁹

Consequently, more competition may not yield greater quality when firms have difficulty explaining the quality improvement to the consumer, rivals can confuse consumers with similar claims, consumers cannot readily identify the better quality products, and as a result the innovator’s sales and profits do not increase.⁷⁰ In those instances, the cost in improving quality outweighs the likely gain.

Two-sided markets⁷¹

In some two-sided markets, a firm offers a product or service for free to consumers and in turn sells to advertisers the ability to access these consumers. As discussed earlier, when the product or service is offered for free, the primary dimension of competition is quality. But when the producer primarily earns its profits from one side of the market (such as advertising), its incentive to degrade quality (below levels that consumers prefer) on the other side of the market can increase.

The European Commission discussed this scenario in the Internet search/search advertising markets.⁷² A search engine is a matchmaker between advertisers and consumers searching for products, services, or information. The search engine provides ‘organic (or algorithmic) and advertising (or sponsored) results’.⁷³ Search engines, therefore, compete for consumers by providing quality (more relevant and quicker) search results.⁷⁴ However, as the European Commission found, a search engine provider can also have the incentive to degrade the quality of its search results: the more relevant ‘organic’ results the search engine provides, the less likely that consumers will click on the sponsored results, and the less potential advertising revenue the search engine generates.⁷⁵ Thus, the search engine can have the incentive to promote—and rank higher—its sponsored results and provide fewer—and rank lower—the organic results.⁷⁶ A firm is more likely to degrade its search results, the European Commission noted, when the competing search engines provide different organic results and ‘it is inherently difficult for the user to assess whether the platform engages in this behavior’.⁷⁷

The European Commission did not believe that the Microsoft/Yahoo! transaction would cause the parties to degrade the quality of its search engine results, given Google’s presence.⁷⁸ But the Commission is currently investigating Google in part for degrading the quality of its search results. Among other things, the Commission is concerned that Google may have abused its dominant position by, inter alia, promoting its own search services over rivals’ services for specific categories of information, such as hotels and restaurants. Consumers, the Commission observed, ‘are not aware of the promotion of Google’s services within the search results’, and are harmed when Google marginalizes equally relevant (or potentially more relevant) competing search services.⁷⁹

Google is dominant in the search engine market, but this quality degradation can also occur in other more competitive two-sided markets. For example, newspapers may compete vigorously in their news coverage, but may skew their news coverage through self-censorship to avoid offending an important category of advertisers. Radio stations can skew playlists to music companies that pay them for airing their songs.⁸⁰ Consequently, in two-sided markets, producers may degrade the quality of the free product when doing so maximizes revenue from the other side of the market, such as advertising revenue. This is again more likely when first, consumers cannot discern the degradation in quality, because they lack objective benchmarks, and secondly, it is prohibitively expensive or difficult for rivals to convey to consumers the inherent quality differences in the product offerings.

Exploiting consumer biases and imperfect willpower

Firms will also have a disincentive to invest in quality when debiasing consumers and improving their willpower are costly and unprofitable. In competitive markets, one expects firms to provide products and services that help address issues for consumers. One problem is that consumers, on account of their overconfidence, general optimism, or failure to appreciate the full extent of their imperfect willpower, may feel they do not need a given product or service. When the cost of educating the customer cannot be recovered or when the investment is exposed to freeriding, companies may underinvest in quality products.

For example, financial products can be tailored to help consumers reduce the risk of default and increase savings. But consumers can be overoptimistic about their ability and willpower to pay the credit card purchases timely. They underestimate the costs of their future borrowings. Therefore, the optimistic consumers would ordinarily choose credit cards with lower annual fees (but higher financing fees and penalties) over better suited products (eg credit cards with higher annual fees but lower interest rates and late payment penalties).

In principle, competition can promote this quality dimension in several respects: first the quality of services to help debias consumers; secondly, the quality of the financial product (in reducing risk and addressing the consumers’ needs); and thirdly, the quality of service in forewarning consumers of competitors’ attempt to exploit them. However, firms, facing intense competition, may find that it makes more sense to unilaterally offer similar lower quality products that exploit consumer biases, rather than incurring the costs to provide quality informational services to help consumers debias.

Suppose it is expensive for a credit card issuer to educate consumers of the likely total costs of using the credit card, their bounded willpower, and their overconfidence. The credit card issuer will not invest in debiasing consumers if other competitors can successfully freeride on the company’s educational efforts and offer similar credit cards with lower fees. Alternatively, the credit card company will not invest if the debiased consumers do not remain with the helpful credit card company. The debiased consumers switch to the remaining exploiting credit card issuers, where they, along with the other sophisticated customers, benefit from the exploitation (such as getting airline miles for their purchases, while not incurring any late fees). Under either scenario, debiasing reduces the credit card company’s profits, without offering any lasting competitive advantage. Consequently, the industry profits more in exploiting consumers’ biases, heuristics, and imperfect willpower. Naïve consumers will not demand better suited products. Firms have little financial incentive to help naïve consumers choose better products. Market supply skews towards products and services that exploit or reinforce consumers’ bounded willpower and rationality.

At times, consumers consider the short-term immediate price rather than the long-term cost from the use of the product. Consumers may, for example, purchase a lower quality, less-expensive washing machine, when they could save more money over the long term by purchasing a higher quality, more efficient machine. The Indonesian competition authority explained how consumer biases and imperfect willpower can adversely affect the supply of higher quality goods that improve consumers’ welfare:

A market dominated by short-term oriented consumers is actually unfavorable for the market leader because it will be difficult for the market leader to improve the loyalty of consumers. The consumers are easily tempted by offers, advertisement/gimmick, or discounts from the competitor. As a result, the action often taken by the business actors as the solution is by reducing the price of the product. The consumers are not very much aware of a deterioration of quality of a product as long as the price is affordable.⁸¹

Nor is competition the solution. Entry and greater competition, as one recent survey found, can worsen, rather than improve, the situation:

The most striking result of the literature so far is that increasing competition through fostering entry of more firms may not on its own always improve outcomes for consumers. Indeed competition may not help when there are at least some consumers who do not search properly or have difficulties judging quality and prices … In the presence of such consumers it is no longer clear that firms necessarily have an incentive to compete by offering better deals. Rather, they can focus on exploiting biased consumers who are very likely to purchase from them regardless of price and quality. These effects can be made worse through firms’ deliberate attempts to make price comparisons and search harder (through complex pricing, shrouding, etc) and obscure product quality. The incentives to engage in such activities become more intense when there are more competitors.⁸²

Here too we see in these markets the two necessary, but not sufficient, conditions, with a twist. First, consumers act with incomplete knowledge. They misjudge not only the product’s quality,⁸³ but also the degree of their own biases and willpower. The consumers desire certain objectives (such as increasing savings, less risk) but misjudge their future behaviour. Consumers, for example, may overestimate their frequency to go to the gym, and thereby select an annual membership when a pay per visit membership would be cheaper.⁸⁴

Secondly, in these markets firms cannot attain a competitive advantage in building trust and reputation by debiasing consumers or not exploiting their biases and imperfect willpower. In these markets, it is prohibitively expensive or difficult to debias, or doing so may not secure additional business from the debiased consumer (who can benefit from the behavioural exploitation of others by choosing the credit card that offers customers perks).

These outcomes not only affect the producers’ incentive to invest in quality; they may also enable producers to exploit an information bias. Such may be the case, as illustrated in Section III, when information and communications are inaccurate or misleading.

Exploiting the imperfect market

Competition authorities rely on the heuristic that when prices and quality vary, consumers will weigh up the offerings using an internal price–quality metric. Thus, if products have multiple dimensions of quality, one can imagine a dizzying array of products, with different prices, touting different attributes. Hence, one perceived benefit of competition is its providing consumers with more choices of goods and services.⁸⁵ The economic theories underlying competition law presume that increasing variety to meet consumer demand generally increases well-being, as consumers can more easily select the option that best meets their needs and wants (ie the more options I have, the more likely it is that I will find the product that closely matches my internal price–quality preference).

As the number of product attributes increase, the information regarding each differentiated option increases as well; the required attention and burden on deliberative, System 2 thinking to process the information increase as consumers trade-off the relative benefits and disadvantages of the different options.⁸⁶

Enter choice overload, which consumers at times suffer when trying to decide among many (often complex) options.⁸⁷ As product attributes increase in complexity, one cannot expect consumers to invest extensive time and energy into understanding all the available options, in searching for and comparing price and quality, and choosing the product that closely matches their preferences, all at the expense of other mental pursuits.⁸⁸ At times, consumers lack clear preferences and simply stick with the default option.⁸⁹ When confronted by many options, they may simply avoid choosing, even when any choice is preferable to not choosing.⁹⁰ As a result, they forgo potentially superior options and maintain the status quo, to their detriment.⁹¹ Alternatively, cognitive overload reduces consumers’ self-control, leading them to ignore product attributes which they value, and accept simple or default options.⁹² Interestingly, the need to evaluate a number of different options may itself harm welfare. Although consumers generally appreciate choice, ‘the tendency to search long and hard reduces enjoyment from the end result’.⁹³

One issue is that companies can take advantage of consumers’ difficulty in processing many complex options. Producers, by creating complex price/quality parameters, may facilitate consumer error or bias, to their advantage. Here, firms add options and increase their products’ complexity to manipulate consumer demand by making it difficult to appraise quality and compare products.⁹⁴ Firms increase the consumers’ search and evaluation costs, thus driving consumers to rely on basic signalling that benefits the firms. One example is rankings. Consumers may ignore complex attributes and focus on one simple parameter (such as basing their judgment on ranking rather than continuous quality scores).⁹⁵ Knowing this, firms (like US law schools⁹⁶) can be ingenious in finding ways to game the ranking system without necessarily improving quality.⁹⁷ Finally, firms increase the complexity of their contracts to increase their customers’ switching costs and to more effectively price discriminate.⁹⁸ In short, firms increase complexity to render market conditions less susceptible to effective competition.

One study found that as competition in US telecommunication markets increased, telecommunication providers offered more complicated, bad-value price plans.⁹⁹ The increased competition caused ‘cellphone providers to focus on raising profitability through creating confusion and gaining from consumer mistakes’, rather than from charging monopoly prices.¹⁰⁰ One criticism of the mobile phone industry is its deliberately increasing choice complexity to exploit consumers:

Too much and too complex information have made it difficult for all but the most technologically savvy to choose the product best suited to their needs. Customers unable to choose based on attribute preferences appeared to make their choices based on price, only to later find out that the product did not meet their needs. This tendency is further complicated by a lack of comprehension. When provided with multiple options, consumers are only able to choose the least expensive about 65% of the time. When faced with the complex options of base service fees, additional features and cost for usage overages, customers tend to choose plans that greatly exceed their requirements, significantly overpaying each month rather than risking the chance of occasional overage costs. Problems navigating the telecommunications industry are not limited to older adults, although they may be particularly vulnerable.¹⁰¹

Similarly, another recent study found that a greater variety of price plans in UK electricity markets led more consumers to choose sub-optimally, harming their welfare.¹⁰² Ultimately, companies can design the number and types of options they offer to exploit consumers’ cognitive overload.

Another approach involves firms selectively investing in quality. In markets where customer feedback and reviews facilitate information flows, the producer may identify areas where dimensions of quality are less transparent and forms the point of least resistance. Accordingly, producers invest in the known dimensions of quality, which are subject to scrutiny, but underinvest in the other quality dimensions. Food companies, for example, may focus on visible aspects of quality such as taste and appearance, ignoring features less visible to consumers, such as safety and hygiene.¹⁰³

Here again we see the two necessary, but not sufficient, conditions, again with a twist. First consumers act with incomplete knowledge regarding the product’s overall quality. But this is a caused in part by consumer preference in having more choices. Consumers might feel regret if they purchase a simpler product with fewer attributes—believing that they will need the attributes far more than they actually will.¹⁰⁴ Naïve consumers may overestimate the quality benefits of particular attributes, thereby skewing supply to products with one great feature but lower overall quality—to the detriment of sophisticated purchasers.¹⁰⁵

Secondly, in these markets, firms cannot attain a competitive advantage by simplifying the choice architecture. One reason, as discussed with behavioural exploitation, is that it may be more profitable to increase complexity and thereby soften competition. Another reason is that firms in some industries may face a collective action problem.¹⁰⁶

V. THE UNIQUE CASE OF QUALITY DEGRADATION BY PRODUCERS

Section IV considered how firms will underinvest in quality, despite the presence of competitive pressure, due to communications imperfections and consumer biases.

This section pushes further to consider unique circumstances where, faced with intense competition and downward pressure on price, sellers will actively erode their products’ quality. This sub-group is fascinating. The positive correlation between competition and quality not only breaks down, but also gives way to negative correlation and clear welfare loss.

Conditions and outcomes

A producer may choose unilaterally to degrade quality, as this may be the least resistant path to successfully absorbing the pressures of fierce competition. Not surprisingly, this phenomenon is limited to where the product characteristics enable producers to disguise their reducing the product’s quality and consumers thus do not detect the quality erosion. This may be the case with complex products and components and when customers lack clear parameters for assessing quality or the requisite knowledge or sophistication.

Evidently, quality erosion creates a business risk for the producer or service provider. One would, therefore, expect quality erosion when consumers are locked in, where producers can externalize the risk, or alternatively—as a last resort—when no other legitimate actions enable the company to remain in the market.

To illustrate, imagine a competitive upstream production market, which supplies a concentrated midstream market with buyer power. Such market conditions often result in downward pressure on price, to the benefit of consumers. Indeed, outside the monopsony model, where both the seller’s price and quality of its products can be depressed,¹⁰⁷ it is assumed that powerful buyers will pass part of the cost benefit to consumers.

Now, consider the following scenario while focusing on the quality variant. Imagine an upstream producer of private label pasta sauce which deals with a leading supermarket chain. The powerful buyer wants to lower its retail prices, and thereby seeks a cost reduction for its pasta sauce. The pasta sauce producer needs to be in the leading supermarket chain. Accordingly, the pasta sauce producer lowers its bid for the subsequent year. This enables it to win the contract for an additional year against fierce horizontal competition from the other sauce producers. Having won the contract, and faced with a fixed price, the pasta sauce producer remains exposed to market changes: for example, increases in the price of raw materials, such as tomatoes, labour, etc. When faced with costs fluctuations, the private label supplier’s point of least resistance—to the extent that it is possible—is quality.

To the extent that the sophisticated supermarket and its customers are unable to detect changes to the product’s quality and ‘punish’ the private label pasta producer—quality can gradually erode. Importantly, that process takes place alongside visible price reductions, perceived welfare gain and healthy and efficient competition. Granted some consumers may place a greater emphasis on lower prices than higher quality. But note that even these consumers pay more than what they would have had they known about the inferior quality. In other words, the customer receives less than for what they bargained.

In addition, quality erosion may lead to a competitive race to the bottom. The price achieved through quality erosion is often below optimal levels and forces other, as efficient, sellers to lower their bids below prevailing cost levels and engage in similar practices. Absent adequate regulation, consumer awareness or quality control, the outcome may be detrimental. This race to the bottom is not limited solely to product quality. Producers may further externalize costs by degrading labour and environmental safety practices.¹⁰⁸

In addition to unilateral quality degradation, one should also note the possibility for collusive quality degradation. Here, competitors agree to limit quality competition. As the Ukrainian competition authority observed:

[G]iven a high degree of market transparency and a highly competitive market, the manufacturers tend to use parallel decrease of product quality as a way of decreasing their costs, thereby increasing their competitiveness. If direct evidence that a parallel decrease of quality is the result of business entities’ concerted actions is available, competition authorities have to react. In other cases of a parallel reduction of quality in competitive markets it is more appropriate, in our view, to use of tools of technical regulation.¹⁰⁹

When powerful buyers depress prices to levels that undermine the producer’s present or future profitability and business viability, quality erosion, although risky, provides a way out. The best route to restore profitability may be to reduce surreptitiously the product’s quality or otherwise externalize costs (such as polluting). Accordingly, as the powerful buyer reduces its supplier’s price, the supplier—to retain profits at its pre-discount levels—will reduce quality further.¹¹⁰ Interestingly, competition pushes the producer to focus on short term gain; under this competitive pressure, the producer does not have the benefit of longevity to consider long-term outcomes which may well be relevant in repeated interaction with buyers and consumers.

One competition authority stated that if the product is ‘purchased infrequently, a firm may be better able to decrease quality, particularly if product quality is also difficult to discern prior to purchase’.¹¹¹ But the opposite is also true. A firm may be better able to decrease quality incrementally if the product is purchased frequently, as the taste of tomato sauce is degraded slightly each month. Whichever is true for that industry, this quality degradation occurs when consumers cannot detect and respond to the quality erosion.

This problem of quality degradation, of course, can arise under oligopolies or monopolies. But a monopoly will offer quality innovations when they provide additional profits (or help maintain its monopoly). The monopoly is more likely to recapture its investment in informing consumers of the quality benefits.

Both categories illustrate how at times, the correlation between quality and competition is imperfect. At times, competitive pressure, even intense pressure, will reduce, rather than safeguard, consumer welfare.

This phenomenon may be more common in daily life than one would expect. We illustrate its manifestation in three distinct areas.

Private labels

The production of private (own) labels may provide opportunities for quality erosion where the buyer lacks the sophistication to identify quality degradation. As the private label producer does not own the brand, it is often less exposed to the risks of quality erosion.¹¹² Such erosion may affect the quality of food products, personal care products, cleaning products, and more.¹¹³

Take, for example, reports in Europe concerning the budget private label ‘Euro Shopper’—used by a few major European retailers. Some of Euro Shopper’s sauces and products were found to contain water as the main ingredient, leading to the retailers terminating their supply agreements.¹¹⁴ Similarly, in the UK, three of the larger retailers withdrew from their shelves fish products sold under their own label which were found to be adulterated.¹¹⁵ Beef and chicken product were also subjected to similar practices.¹¹⁶ A similar practice of adding water to fish products was exposed in Germany, leading to a removal of the Edka private label King Prawns from shelves.¹¹⁷ These are not isolated cases.¹¹⁸ Other practices may concern the chemical composition and active ingredients in detergents and care products.¹¹⁹

Externalities may also be found in products having long supply chains that detach the source of the product from the end consumer. The horsemeat scandal which dominated the media in Europe in 2013 is illustrative. Following investigation by the Irish Food Standards Agency, many prepared meals across the EU were found to contain horsemeat despite their packaging, which advertised the meat as 100 per cent beef.¹²⁰ Likewise, McDonald’s sales in Asia dropped after the discovery that its supplier was accused of repackaging old meat as new.¹²¹ These scandals highlight the complexity of distribution channels and their susceptibility to fraud.¹²² Interestingly, fraudulent labelling may also occur at the retailer level. In Sweden, for example, a conspiracy to repackage of out-of-date meat was exposed and led to a criminal investigation into four stores in the Swedish ICA supermarket chain.¹²³

Locked in customers—care homes

Quality erosion can also occur when the customer is locked in with no outside options and is not the one choosing the provider or paying for its services.¹²⁴ Some areas of public procurement exhibit these characteristics. In these instances, it is indeed interesting to ask whether focusing primarily on price and cost truly delivers greater value or in fact results in lower value, albeit unquantifiable, as quality is eroded.

Take, for example, the provision of care homes in the UK. Their quality erosion made the headlines in 2011. Interestingly, the quality erosion was reported by the provider and tacitly accepted by the buyer—the National Health Service (NHS). Arguably, the NHS did not fully internalize the cost of the erosion and was incentivized to increase pressure on price on account of the patients.¹²⁵ In that instance, a large number of care homes which provided services for the NHS argued that the NHS had been systematically reducing its payments, thereby undermining the quality of service. They argued that the NHS used ‘its dominant purchasing power in a way that involved “coercion not competition and is giving precedence to price over other necessary considerations”, which included the cost of providing care and the impact on patients’.¹²⁶

More generally, with respect to the health sector, it is interesting to note that by and large, a positive correlation exists between competition and quality of the services.¹²⁷ However, some studies suggest that ‘market competition might be a blunt instrument and it may not be the most suitable policy tool to drive hospital quality-improvement effects’.¹²⁸

Airlines

Interestingly, quality erosion may also be detected in well-regulated industries. Here, such degradation of service and quality may exist within the margins allowed for by the relevant regulation. It may allow the provider to offer attractive prices, while reducing less-transparent areas of service.

The proliferation of budget airlines has increased the pressure on airlines to provide services at lower costs. Some of the price reductions are accompanied with transparent changes to quality of service. Others, however, may involve disguised variants. Indeed, intense competition may induce airlines to exploit consumers’ behavioural biases, involving less-salient factors of quality.

Take, for example, the possible impact on safety and air delays. According to figures published by the Civil Aviation Authority, between 2010 and 2012, pilots had to make 28 emergency landings at British airports because of fuel shortages. Over a period of four years, between 2009 and 2013, 224 British-registered aircrafts flying into British airports or overseas reported low-fuel incidents.¹²⁹ Reportedly, pilots can be under pressure from the airlines’ needs to minimize costs and carry the lowest fuel intake permitted by EU regulations.¹³⁰ As one pilot reported: ‘I’m constantly under pressure to carry less fuel than I’m comfortable with … Sometimes if you carry just enough fuel and you hit thunderstorms or delays, then suddenly you’re running out of gas and you have to go to an alternate airport.’¹³¹ According to the regulatory framework, airlines should not be allowed to take off without enough fuel to reach their destination and without accounting for alternative airports in their flight plan together with an additional 30 minutes flying and a final approach before landing.¹³² Usually, low-fuel incidents take place in the event of bad weather, where fights are inclined to spend more time in the air than originally planned.¹³³

Apart from the above-mentioned instances of low-fuel emergency landings, the airline sector provides further examples of possible quality erosion. Intense competition in the airline sector drove Qantas’ decision to open a new operator in Asia, where the associated costs are much lower. This decision would amount to 1000 job cuts and the Transport Workers Union alleged that it would result in a rapid decline in standards, though Qantas rebutted this allegation. Irrespective of the actual truth of statements of this sort, the fact remains that the decision was driven by excess competition and could possibly result in a lowering of operating standards.¹³⁴

Another illustrative example concerns air quality in airplanes.¹³⁵ Other, less-sensitive areas in which quality erosion may be detected concern the airlines’ practice of unbundling the charges for checked bags in airline travel,¹³⁶ changes to flight schedule, carry-on baggage policies, leg room, quality of onboard meal and drink service, quality of frequent flyer programmes, and other ancillary services.¹³⁷

VI. CONCLUSION

No one disagrees that quality is a fundamental aspect of competition. As we point out, quality will be especially important in two-sided markets where a product or service is offered for free. Nor do we fundamentally disagree with the two heuristics upon which the competition authorities rely. We accept that at times quality and competition are positively correlated, ie more competition will generally increase quality for a given price or reduce price for a given level of quality. We also accept that when prices and quality vary, consumers at times will weigh up the offerings using an internal price–quality metric.

We aim here to identify several scenarios where these heuristics break down, where competition and quality are not positively correlated, and where an increase in competition can actually reduce consumer welfare. We also aim to identify two necessary, but not sufficient, conditions common to each scenario. The first relates to the consumers’ limited ability to accurately assess quality differences. This may be attributable to external factors (such as deceptive claims) or dispositional factors (such as consumer biases or imperfect willpower). The second concerns imperfect information flows that make it difficult or costly to convey to consumers the products’ or services’ inherent quality differences. Companies recognize that neither they nor their competitors can easily or inexpensively convey to consumers the inherent quality differences in their and their competitors’ product offerings. With these two conditions in mind, we have demonstrated instances in which an increase in competition will not increase quality (when one would expect it should) and in which competition is inversely correlated with quality, and its increase would lead to quality degradation.

A sophisticated company is likely to identify instances in which quality forms the point of least resistance. We note that in a repeated game one would assume a cost and risk, which the producer will attribute when engaging in limited or underinvestment in quality. We show, however, that under certain market conditions, the rational and profit maximizing strategy would involve quality manipulation, despite competitive pressure. In other instances, it is the alternative cost of being forced out of the market which may lead firms to degrade quality.

Hence, should competition authorities continue to rely on their two heuristics? Yes, but they must exercise caution in markets characterized by the two conditions we identify. If they apply their heuristics uncritically in these markets, there is a greater risk that they will reach the wrong conclusion or fail to appreciate the degradation in quality.

This article lays out the risk, but more inquiry is required on the additional steps the competition authorities can and should take in these markets. Granted that competition authorities will at times have difficulties in directly assessing and measuring quality, and other policy constraints may also cause the agencies to rely on their two heuristics. But the authorities must carefully consider the possibility of negative or no correlation between competitive pressure and quality. In those instances, when possible, the competition authority must try to measure more directly the challenged merger’s or restraint’s impact on quality.

Another implication of our analysis concerns the benefit of competition. First, we showed instances where competition fails to improve quality and consumer welfare, when one ordinarily assumes it should. Secondly, we noted that more competition is not always the elixir in imperfect markets. For example, new entry may increase, rather than ameliorate, firms’ exploiting consumer bias and information asymmetries.¹³⁸

Hence, what is the alternative? These limitations of the competitive process and of expost competition enforcement draw attention to other enforcement mechanisms. One alternative involves exante enforcement, in the form of sector inquiries and market studies aimed at identifying market failures. Such measures may result in monitoring tools, discussion forums, and industry codes.¹³⁹ Another approach involves industry regulation designed with the producers’ incentive and disincentives in mind. The regulatory aim here is to prevent a competitive race to the bottom and its attendant health and safety risks. Regulation may target informational asymmetries or focus on the supply of goods and service.

We do not attempt to explore these enforcement avenues in this article. Our focus has been on unveiling and identifying conditions in which you do not always get what you pay for, even when competition is fierce.