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consumers and trust November 14, 2007

Posted by Bradley in : Uncategorized , trackback

Increasing numbers of voices are raising questions about how trusting consumers should be. Toy recalls have raised issues of trust for consumers: how can consumers be sure that products they buy are safe? Publicity about unscrupulous lending practices also harms consumer confidence (via creditslips). From a policy perspective both toy recalls and predatory lending involve information asymmetries. Consumers have not understood well the risks of buying certain products, whether they are buying toys or loans. And sellers of toys and loans haven’t always had the clearest incentives, in the market or from regulation, to make clear to consumers the risks involved in their purchases.
In the EU today, Commissioner Meglena Kuneva announced that the EU Commission had taken action on misleading advertising and unfair practices on airline ticket selling websites. And in the financial markets there is uncertainty about how much of corporate pr can be trusted (via Information Arbitrage):

Now if investors had the confidence that what was coming out of corporate PR departments was the truth, the whole truth and nothing but the truth (and not until the next time they release a new version of the truth), I believe the amplitude of the ups and downs we’ve witnessed would be muted. Why? Because trading would be based on fundamentals, not on persistent uncertainty. And if one adjusts cash flow discount rates to take into account these extreme uncertainties, models become very, very sensitive to changes in perception. And these perceptions, given the lack of investor confidence in the information they’re receiving, are changing literally by the minute. This is no way to run an organized, orderly market. Things have got to change, and corporate managements and their Boards hold the keys.

Even the EU Commission, in a publication called Wise Choices, which contains a lot of paternalistic advice across a wide range of issues and is sent to many many schools around the EU, raises some questions about business practices:

We all like to get a bargain and save money on clothes, food and electrical appliances. But in Europe we don’t believe in trade at any price. Would you be happy to buy a pair of cheap trainers if you knew that they were made by a child who should have been at school? Would you be pleased to find a TV at a bargain price if you knew that the factory worker who packed it had been injured because he was working in an unsafe environment?

The problems are evident, but the solution(s) less so.

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