07 Aug 2006  Research & Ideas

Whatever Happened to Caveat Emptor?

In many world nations, consumers enjoy vast protections that are relatively new on the scene. Why the rapid rise in consumer protectionism? Why do these efforts vary from country to country? A discussion with professor Gunnar Trumbull on his new book, Consumer Capitalism. Key concepts include:

  • Until the 1960s, consumers enjoyed few regulatory protections from faulty products. The United States led the change.
  • Consumer protections, which vary in scope and intent from country to country, influence product design. Germans favor quality; the French, innovation.
  • Consumers benefit from these protections, but as part of a larger trend toward modernization, something in the social fabric is lost.

 

Many of us learned at an early age the expression caveat emptor, or let the buyer beware. The phrase conjured up an image of a roiling, rollicking market that consumers best entered equipped for battle and prepared for disappointment—or worse—if a product went bad. Now, says Professor Gunnar Trumbull, that unfettered marketplace has "virtually disappeared."

"Today, arguably no other economic actor in the advanced industrial countries—not the investor, not the worker, not the welfare recipient—enjoys a more thorough set of legal and institutional protections than the modern consumer when he or she enters the corner store."

What's more, these protections, which have been on a dramatic increase over the last forty years, vary in nature and intent from country to country, influencing the diversity of products that consumers buy. In Germany, for example (Trumbull studied consumer protection efforts in Germany and France), consumers favor products that evolved slowly and are well engineered, while the French prefer style and innovation. These preferences are not just a matter of national DNA, but also reflect decisions made by product designers to respond to consumer laws in those countries.

In his new book, Consumer Capitalism: Politics, Product Markets, and Firm Strategy in France and Germany, Trumbull looks at the implications of this rise of consumer protectionism.

Sean Silverthorne: You note that until the 1970s there was very little in the way of institutional consumer protections: Consumers were, as caveat emptor suggests, on their own. What caused the rapid rise in modern consumer protections?

Gunnar Trumbull: The main driver has been affluence. As an increasing percentage of homes began to have refrigerators, stoves, and cars, consumers shifted their focus from basic material needs to concerns about the safety and quality of these products. When products did fail—as happened dramatically in the late 1950s with the antinausea drug Thalidomide—such cases became the focus of aggressive consumer group mobilizations that politicized the problems that consumers faced.

There is also a second cause, one that has its roots in the changing shopping experience. During the 1960s, European retailing began moving away from personalized service and toward new self-service sales formats. Abetted by the spread of the automobile, large-surface-area retailers such as Carrefour and Metro grew rapidly. The retail revolution brought convenience, efficiency, and lower prices. But it also left consumers less protected against the risks associated with new kinds of products that were coming on the market. Consumers who had in the past relied on friendly sales staffs to guide them through purchasing decisions were now on their own. Governments stepped in to fill this gap.

Q: You use the consumer protection experiences in France and Germany as the basis for your book. Why those two countries?

A: The United States is in many ways the world leader in consumer protection. Its early milestones—comparative product tests launched by Consumer Reports in 1936, the Kennedy administration's Consumer Bill of Rights in 1960, Ralph Nader's critique of the U.S. automobile industry in Unsafe at Any Speed in 1965—became models for subsequent consumer protection policies around the world. If my goal had been to explore the historical roots of consumer protection, the U.S. case would have been a natural focus.

German companies have been able to excel in highly engineered products in part because German consumers pay close attention.

I wanted instead to understand why we observe so much diversity in the regulation of national consumer markets. For this purpose, I needed countries that were economically and politically similar. There are no perfect experiments in the social sciences, but the French and German consumer movements came close. Both countries had similar levels of economic development, shared a continental European political and social culture, and began regulating consumer markets at nearly the same time. Yet their policy solutions were dramatically different.

This methodological approach, what J. S. Mill called the "method of difference," allows me to tease out those factors that caused the different solutions.

Q: How did the development of the distinctive consumer protections that evolved in each country influence the marketing strategies of producers and the buying decisions of consumers in those countries?

A: One example is the role of comparative product testing in Germany. Product tests, conducted by the Warentest Institute and published in their monthly magazine Test, influence both consumers and producers. With an estimated 5 million readers, Warentest is the second-most-trusted institution in Germany, behind only the Red Cross.

Results published in Test appear to have a dramatic impact on product choice. Fully half of German companies report incorporating the testing criteria employed by Warentest into their new product designs; two-thirds of German retailers report favoring products that receive good test scores.

I argue that German companies have been able to excel in highly engineered products in part because German consumers pay close attention to technical product qualities when they purchase.

Q: Although consumers presumably benefit from being "swaddled," as you say, in legal and institutional protections, do they also lose something as well? What are the tradeoffs?

A: In a sense, the story of consumer market regulation is only a recent chapter in the broader arc of modernization. As economic functions in society become differentiated and specialized, traditional social relations are often strained. The unraveling of social relations, in turn, creates pressures for the state to step in as an economic intermediary.

We need to pay more attention to domestic consumer market regulation as a source of national competitiveness.

What is progressively lost is the social context of economic life. We no longer know the experience of daily shopping, the social structure of the marketplace and the corner store, the personal interaction with artisans and shopkeepers. Consumers today are increasingly insulated from the context of production. How much of a loss is this? Daily shopping is time consuming, and haggling in the market is not for the fainthearted. Few of us would want to return to the world of traditional unregulated consumer markets. But we pay for the convenience of Wal-Mart or Carrefour with a loss of social fabric.

Q: Although your book focuses on domestic policies, you also touch on the question of the dynamic between consumer protection and globalization. How do local consumer protections affect global free trade? Are there agencies that offer consumer protections on a global scale?

A: Consumer market regulations matter to global trade in two ways. First, they are increasingly at the center of global trade disputes. World Trade Organization (WTO) disputes between Europe and the United States over hormone-treated beef and genetically modified crops evoke how difficult it can be to reconcile different consumer protection regimes. The challenge for trade negotiators is to distinguish those protections that reflect genuine consumer concerns from those that merely protect trade-exposed domestic producers. For the moment, such disagreements are managed by the dispute- settlement body of the WTO.

There is another way in which consumer market regulation drives trade. Countries tend to enjoy export success in product segments for which their domestic consumers favor high levels of quality. French wines succeed internationally because they enjoy domestic market regulations that promote demand for quality production.

Such cases suggest that we need to pay more attention to domestic consumer market regulation as a source of national competitiveness.

Q: Although not a subject of your study, I wonder if you have thoughts on how consumer protections are evolving in emerging markets such as India and China.

A: Consumer protection has until now been a preoccupation of affluent societies. Yet there are signs that both India and China are starting to worry about these issues. This makes it a fascinating area for future research. One advantage of aggressive consumer protection regimes is the discipline that it imposes on domestic producers. The bulk of Chinese manufacturing, after all, is consumed domestically. The more sophisticated and organized the domestic consumer base becomes, the easier it will be for China to move into high-quality areas of production. In a real sense, consumer protections have become a critical component of national economic strategy.

Q: What are the practical implications of your research for producers?

A: Important dimensions of consumer choice emerge in response to the institutional context in which they operate. If we place the same consumer in a traditional corner store and in Wal-Mart, he or she will make different product choices. Similarly, systematically different legal and administrative cultures can cause consumers to favor different kinds of product qualities. Businesses that operate in multiple markets, in particular, should take time to understand how consumer preferences have been institutionalized in different national settings. These institutions influence how consumers rank their preferences over such product dimensions as quality versus price, personalized service versus anonymity, innovation versus risk.

Q: What are you working on now?

A: In my current project, I am extending the research I have conducted in France and Germany to a comparative study of all of the advanced industrialized countries. My goal is to analyze the historical evolution of consumption in the advanced industrialized economies. Specifically, what role have distinctive consumer market institutions played in the postwar trajectories of these countries? This is the question I hope to answer.

Excerpt from Consumer Capitalism: Politics, Product Markets, and Firm Strategy in France and Germany, by Gunnar Trumbull.

With the state's assumption of responsibility for product risk and information came government control over the institutional context in which consumers made their purchases. How countries deployed these new institutions differed significantly. As the research presented below demonstrates, Germany responded by emphasizing product information as a means of consumer protection, on the grounds that this offered consumers a better basis for judging for themselves the qualities of products. France responded differently, implementing national policies that worked to insulate consumers from product-related risk. Their goal was not to inform consumers but rather to protect them from potential risks associated with new products. Both of these approaches offered an effective response to the challenges facing consumers. But they also created different market rules within which domestic consumers would learn to operate.

The impact of this difference has been to favor certain kinds of company investment over others in each country. The French approach allowed consumers to buy any product without concern about product-related loss, since government policies formally protected them against loss from any product. Hence even radical new products seemed attractive. Moreover, because French consumers did not need to rely on information about products to protect themselves—not that they tended to have ready access to such information in the first place—they were less discerning about incremental improvements in engineering or design. In this way, the French approach to consumer protection favored a product strategy that emphasized novelty and discouraged investment in incremental quality improvement. For Germany, the emphasis on consumer information as a means of protection had the opposite effect. Because German consumers relied heavily on product knowledge to ensure that they were buying safe and useful products, they also learned to discern incremental advances in design and engineering. By contrast, their reliance on information caused them to avoid radically new kinds of products for which reliable assessment remained difficult. This bias has implications for German producers, who disproportionately invested in the sorts of design and engineering improvements that German consumers favored. The result was to create two different dynamics of market competition in the two countries. Whereas German companies competed along dimensions of quality and engineering, French producers faced competition primarily in innovativeness and style.

The impact of the new consumerist discourse was not limited to policies specifically designed to address consumer protection. Under the influence of the growing public policy emphasis on consumer welfare, a new paradigm of government administration, one grounded on the idea of maximizing the consumer interest, came to dominate policy formation across a broad range of traditional government economic policies. Issues as diverse as the setting of industry standards, pricing, competition policy, and trade policy—all came to be reconceived during this period as matters of consumer protection. In each case, the final test of regulatory effectiveness was the impact, not on the producer, but on the consumer. Moreover, as the new areas of regulation came to be reinterpreted in terms of the consumer interest, they too espoused the particular consumer identity that had emerged during the consumer struggles that had taken place between the late 1960s and the early 1980s.

Reprinted from Consumer Capitalism: Politics, Product Markets, and Firm Strategy in France and Germany, by Gunnar Trumbull. Copyright © 2006 by Cornell University. Used by permission of the publisher, Cornell University Press.

About the author

Sean Silverthorne is the editor of HBS Working Knowledge.