Consumer Impact Assessment

A framework for assessing consumer impacts

Analysis of consumer impacts requires an understanding of the nature of consumer demand in an industry, insight into the effect the policy may have on consumer information, and knowledge as to how consumers may respond to complex products, services and transactions that the policy may help promote.

The following questions offer a framework to assist the analyst in the process of assessing consumer impacts.

1. Is the policy likely to lead to a significant change in the price and quantity of the product or service available in the market, or the quality and choice available to consumers?

This question looks at the impacts on consumers in terms of traditional economic factors, such as price, quantity and quality of the goods or services on offer in the market. Other issues worth examining which may indirectly impact consumers include:

  • Will the policy stimulate or discourage innovation that could improve product quality or reduce prices, or the development of new products and services?
  • Will it add to or reduce competition in specific markets over the short, medium and long term?

Standard economic theory predicts that new policies that reduce industry competitiveness and add substantially to business and industry costs will likely lead to higher consumer prices, reduced quantity of products and services and, perhaps, reduced quality and fewer choices for consumers. This would be particularly true in highly concentrated industries, since businesses facing little competition would likely pass on all or a significant portion of their increased costs to consumers.

The OECD’s Competition Assessment Toolkit (www.oecd.org) and similar products developed by the Competition Bureau (www.competitionbureau.gc.ca) contain guidance that will be helpful when addressing these questions.

2. Is the policy likely to result in material changes to relationships between consumers and business?

With this second question, the analysis of the impact on consumers of new policies goes beyond the traditional areas of concern. It addresses changes in policies that may have an impact on interactions between consumers and business:

  • Will the policy affect consumers’ access to clear, concise and truthful information that allows them to realistically assess the value and usefulness of the product or service?

Knowledge of the industry and its track record in the areas of advertising and marketing will be particularly useful when assessing whether the information that industry provides to consumers is likely to be accurate, useful and helpful.

  • Will the policy lead to situations in which suppliers may take undue advantage of consumers?

Research in the field of behavioural economics suggests that a number of factors beyond quality and price affect the decisions consumers make — that is, that consumers sometimes do not act as rationally as traditional economic theory would suggest. This makes it possible for suppliers to capitalize on the biases consumers have and the resulting mistakes they might make when assessing products and services. Appendix A contains descriptions and examples of two common consumer biases of importance to policy analysts when selecting, designing and assessing policy responses.

A word of caution: measures to mitigate any harm the new policy may create also need to be assessed, since they may have their own, unintended and negative side effects. For example, requiring suppliers to provide certain information about a product or service at the point of sale may lead to information overload for consumers, depending on the volume of information and the manner in which it is presented. This may result in consumers making less informed decisions, because they cannot, or will not, take the time to digest all the details. Moreover, suppliers may benefit because consumers may not consider all the factors related to their purchase, which otherwise may have led them to choose another product, service or supplier.

  • Will it impede or diminish consumers’ ability to seek redress when problems occur?

The industry’s reputation for fairness and meeting its promises and obligations to consumers will provide insight into the potential consumer impacts of a new policy or regulation on the quality of the sales transaction and after sale service, including consumers’ right to complain and be compensated in some way for poor products or bad service.

The OECD’s Consumer Policy Toolkit (2010) (www.oecd.org) contains guidance that will be helpful when addressing these questions.

3. Is the new policy likely to have substantial negative impacts on vulnerable consumers and their interactions with business?

The response to this question brings together the results of the analysis prompted by the first two questions to assess whether the new policy would raise significant concerns related to the vulnerability of some or all consumers. It also addresses fairness and related issues that, in turn, would be expected to lead to significant consumer concerns and complaints, and place the effectiveness and fairness of the policy in significant doubt.

A few definitions will help set the context for this analysis.1

  • Consumer detriment includes, in addition to any physical harm or monetary loss associated with the purchase, satisfaction less than a consumer’s reasonable ex ante expectation or the denial of a transaction sought by a consumer.
  • A vulnerable consumer is a person who is capable of readily or quickly suffering detriment in the process of consumption. A susceptibility to detriment may arise from either the characteristics of the market for a particular product, the product’s qualities or the nature of the transaction; or the individual’s attributes or circumstances which adversely affect consumer decision-making or the pursuit of redress for any detriment suffered; or a combination of these.
  • A disadvantaged consumer is a person in persistent circumstances and/or with ongoing attributes which adversely affect consumption thereby causing a continuing susceptibility to detriment in consumption. As a result, a disadvantaged consumer repeatedly suffers consumer detriments or, alternatively expressed, consistently obtains below-average satisfaction from consumption.

All consumers can be vulnerable at one time or another. There are, however, more profound states of vulnerability in which a consumer is susceptible to particular disadvantage. This may occur, for example, when consumers live in poverty, have low financial or functional literacy skills, or live in geographically isolated communities.2

It is important to analyze the potential impacts of some policy proposals on vulnerable and disadvantaged consumers to ensure the initiative does not make it hard for them to buy critical goods and services such as food, financial and health services, energy, transportation, housing and education.3 For instance, members of low-income households already often pay higher prices than those in other income brackets for tax preparation services, cars, car loans, car insurance, home loans, home insurance, furniture, appliances, electronics and groceries.4

Responses to this question would particularly utilize the policy analyst’s prior knowledge of the industry in question and of past regulatory initiatives in this and similar industries in Canada and other countries. The responses would also benefit from the regulator’s knowledge of the major proponent of the new policy or regulation, and a good knowledge of some of the key positions that Canadian consumer groups and other non-government organizations advocate.

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Footnotes:

1 Menzel Baker, Gentry and Rittenburg (2005) have attempted to define these concepts in Building an Understanding of the Domain of Consumer Vulnerability. The definitions here are from What do we mean by vulnerable and disadvantaged consumers? a discussion paper published by Consumer Affairs Victoria (Australia).

2 Sauvé, R. (2008). Assessing Vulnerabilities of Low Income Consumers, commissioned by the Office of Consumer Affairs, Industry Canada.

3 Comité consultatif de lutte contre la pauvreté et l’exclusion sociale, Planning, Aims and Objectives (2006-2009) Province of Quebec.

4 Brookings Institution (2006). Poverty, Opportunity. Putting the market to work for lower income families. See also, Caplovitz, D. (1967). The Poor Pay More: Consumer Practices of Low-Income Families.