Consumer interest (2004)

Consumer Interest

Sam Choon Yin (2004)

 

Introduction

Consumption is one of the many activities carried out by households. Also known as families, households perform other economic activities like savings, investing, paying taxes, voting and earning labour income. They face the economic problem known as scarcity. A relative concept, scarcity exists because the amount of resources one has is not sufficient to meet all of his/her wants. Because of scarcity, individuals are compelled to make hard choices. The preferences are ranked. A rational individual then chooses the preference with the highest net benefit. Because choices are made, some of the alternatives are sacrificed although the chosen option does bring forth benefit to the individual. The value of the next best alternative forgone is commonly referred to as opportunity cost.

 

It is in the interest of householders to maximize their utilities. Preferring more and not less, householders are generally rational. Rationality is an interesting concept to explain how individuals generally think. It states that householders will seek to acquire all the information necessary so that rational and informed choices can be made. With the information, the alternatives can be more intelligently ranked. In reality, the assumption of perfect information is seldom realized. Information may not be forthcoming. Even if the information is available, householders face the problem of cognitive limits which essentially lowers their ability to decipher and make use of the information. Accordingly, householders need not always be making the most optimal choice. Individuals may be contented with the second best choice. Economics Nobel Prize Winner Herbert Simon termed such behaviour as safisficing. It is useful to recognize the limitation. It tells us for example that the ability to influence one’s decision must be accompanied with information provided to him/her. As long as the information is truthful and enforceable, a rational individual will incorporate them. The benefit-cost equations of the alternatives will be adjusted accordingly. The alternative with the highest net benefit will then be chosen.

 

Understanding the individuals’ thinking process is in my view useful. Consumers are required to make decisions on a frequent basis like what to buy, when to buy and actions to be taken against unethical producers. Consumers have their needs, some of which may be conflicting with the producers. Consumers can be powerful individuals to dictate firm’s behaviour. They can voice their concerns over the media and/or consumers association like the Consumers Association of Singapore (CASE) in Singapore. Consumers may receive protections from the government to see that their interests are protected but the kind of protections received may be limited. The government actually faces a dilemma. It faces the challenge to strike the right balance in protecting the consumers and producers interests. Both the consumers and producers are part of the society which the government has the fiduciary duty to protect. Excessive protection to the consumers like insisting full release of information about the products sold can raise unnecessary costs to the firms.

 

In the next section, I will identify the consumer interest. This is followed by a discussion on why it is important to study them. Then, the paper explains the potential conflicts of interest arise between consumers and firms, and between consumers and the government. Attempts to reconcile the differences are also deliberated.

 

What do consumers want?

Consumers are users of final goods and services. They buy goods and services to satisfy their personal needs, not to support further production. The latter kind of goods is known as investment goods. Consumers participate in the circular flow of income. In the product market, consumers create the demand for final goods and services. Exogenous factors like disposable income, tastes, income tax rates, interest rates and price of related goods can affect the householders’ willingness and ability to purchase the goods and services. Firms react to changes in the demand. For example, in the event that the demand for a certain good increases the good can end up being in shortage. The consumers respond by bidding up the good’s price. This in turn stimulates more production of the good and the country’s economy strengthens as a result.

 

To make the purchase, householders need income. Some of the householders acquire income through the labour market. They supply labour services in exchange for remuneration. There are some householders who do not participate in the labour force. Examples include the retirees, students, housewives and handicapped persons. They acquire income through other means like the support from family members, government and social institutions. They are some who acquire disposable income in the underground economy (UGE). The UGE is that part of the economy which are not officially registered. Some of the householders may decide to bypass the government to avoid paying taxes or going through the corrupt government officials. The underground activities can range from ‘smaller’ activities like offering tuition services to larger ones like drug smuggling, human trafficking, prostitution and money laundering. 

 

According to Thomas Garman, the consumer interest is ‘concerned with securing, protecting and asserting consumer rights primarily in marketplace transactions in order that all consumers receive an acceptable quality of goods and services at fair or low prices’ (Garman, 2002, p. 9). Garman’s definition tells us that consumers want equity treatment for all. Consumers want equal opportunities to make choices in terms of what to buy and how much to buy. They want the goods and services to provide equal benefits regardless of who the consumers are. Equity can also be seen in terms ‘who’ should bear the costs more. Consider the Goods and Services Tax (GST). GST is regressive which means that the poorer persons pay a relatively larger percentage of their income in taxes as compared to the richer individuals. To some, this is unequal. Unsatisfied consumers can make their unhappiness known by voicing their concerns to the government and consumers association. In Singapore, consumers’ participation proves to be useful at least in a partial sense. Their concerns over the initial proposal to raise the GST rate from three percent to five percent in 2003 affected the government’s ultimate decision. The government raised the rate to four percent instead of five in 2003 and to five percent only a year later. Perceived income inequality must be kept to the minimum although complete elimination is not possible. In Singapore, there were attempts to enhance the public transportation system to minimize the feeling of envy because of one’s inability to purchase commercial vehicles. Likewise, public housing were upgraded with the newer ones looking more ‘high class’. One of the purposes was to lower one’s unhappiness because of his/her inability to purchase private housing.

 

It is generally true that consumers are concerned with their ability (or inability) to consume. They recognize that having the freedom to consume is necessary but not sufficient. One reason why the People’s Action Party (PAP) in Singapore was popular with the electorates all these years was that the electorates recognized the capability of the party to bring about greater purchasing power to them. The electorates have more and more ‘ability’ to consume. However, over the years, people were beginning to question the government’s CPF policies which restricted the account holders the freedom to use their savings in the way they had wanted. The situation was worsened by the fact that the government was not very transparent about the way the CPF funds were invested. Also, the guaranteed returns of the CPF funds were not deemed to be sufficiently high relative to the returns that the government was getting from her investments using the CPF funds. The latter’s returns were unfortunately not returned back to the CPF account holders. Some observers labelled this as a form of implicit tax that the account holders were unwillingly paying to the government. The restriction the consumers faced in using their savings could encourage them to participate in the UGE to avoid contributing further to the government’s pocket. The government’s failure to fine-tune its CPF-related policies might cost the government important votes in the next general election.

 

There are certain goods and services that are necessary for the country’s residents to consume so as to enjoy a reasonable standard of living. In this case, the issue on ‘ability to consume’ must be sufficiently addressed such that everyone is given the opportunity to consume these goods and services regardless of their status, race, income status and religion. For example, access to health care, primary education and public goods is essential. The consumers are very much interested to ‘consume’ these goods and services. It is unfortunate that profit maximizing private producers are less willing to provide these goods if they are not able to acquire ‘fees’ from the consumers. The government thus intervenes to see that these goods and services are supplied. The consumers can enjoy these goods and services although not everyone contributes to their creation.

 

Consumers like to have access to information so that more informed choices are made. As I have mentioned earlier, consumers are generally rational. They make choices after assessing the net benefit of the alternatives. To do so confidently, information must be forthcoming. To enhance the consumers’ confidents in their decision-making, the information must be truthful. It pays thus for the producers to be forthcoming with the information about their products. Otherwise, the consumers will have problems knowing in details what kind of goods the producers are actually providing. Such uncertainties should be minimized. Instead, the benefits of using their products must be made known to the consumers.

 

Consumers want choices. Usually, more choices imply more competition among the firms. The winner is one who is able to capture the buyers’ attention. As firms compete with one another, higher quality products are produced. Their prices can also end up relatively lower than the case where competition is more restricted. Having higher quality products at the lowest price possible provides the consumers the benefits that they have always wanted. Consumers demand value for money as Garman’s definition of consumer interest illuminates! More choices can be realized if the country opens up to the global economy. This is true particularly in smaller countries like Singapore. It is not surprising therefore that Singaporeans are generally in favour of freer trade and globalisation. The similar thing cannot be said to relatively larger countries like the United States. Its domestic producers are capable of producing many products locally therefore lowering its urgency to open up. Some consumers are willing to pay higher prices for locally produced goods and services than imported goods from abroad because of the perceived disadvantages that globalisation can bring to the world in general and the US in particular. These are the people who demonstrated in the streets whenever meetings are called to further open up the world economy.

 

Why study consumer interest?

Consumers represent one of the interest groups in a typical society. Understanding the consumer interest is essential for it can effectively influence how the country’s economy is to perform. Consumption contributes to the country’s national income defined most commonly as the total value of goods and services produced within the territorial boundary of the nation. The total production of the country tends to relate positively with consumption. The householders are rewarded with more income to spend since a country’s national output is equivalent to the national income at least in the theoretical sense. Greater ability to spend enhances the consumers’ standards of living. However, higher income need not necessarily make a person happier than before. The chase for more income and higher purchasing power can lead to selfish behaviour and lacking of leisure hours. If the prices of goods and services increase more proportionately than the rise in nominal income, the real income actually decreases. Because of these negative effects, some persons have chosen to live away from the city-centre and avoid the hassle-filled lifestyle and economic disadvantages.

 

The study of consumer interest is useful because consumer interest can influence how the firms and government react. Consider the firms. Because of the profit maximizing principle to abide with, it is only right for the firms to try to meet or exceed the consumer interest to the best of their ability. The firms must strive to capture the consumers’ attention and win business orders from them. Consumers have limited income. They have to decide how best to allocate their limited income. It is the challenge to the firms to see that their goods and services are ultimately chosen. It is thus common nowadays to hear about the urgency to maximize consumers’ needs and understand what consumers want. From the consumer point of view, it is important that the firms practice what they preach and not give false hope to them. Unfortunately, it is not impossible for such false hope to develop because of the potential conflict of interest that can arise between the consumers and producers as the next section illuminates. But nonetheless, there is usually a genuine concern among the firms to see that the consumers are happy with the goods and services they provide. It is not uncommon for example for firms to provide feedback channel and hotline for the consumers to voice their concerns. After all, firms survive because consumers purchase from them and not their competitors.

 

The government also cares for consumer interest. Consumer interest can affect government’s action. It is in the interest of the government to provide some forms of protection to the consumers at least for two reasons. First, consumers are part of the society whose interest the government is supposed to maximize. Second, the consumers are voters and contributors to the government’s funds. Unhappy consumers about the government’s policies can potentially swing votes away from the incumbent government to the opposition parties. Consumers may also decide to participate in the UGE to avoid contributing further to the government’s pocket. The Singapore government is aware of this. It has continuously been trying to appease the interest of the middle class categorized as a group of individuals who spends more of their income on leisure goods, private tuition and travelling. The government has estimated that about 80 percent of the society was middle-class (Rodan, 1996). Because of its largeness, the middle class residents represent an important group of consumers capable of creating the above-mentioned problems to the PAP if their interests are seriously unmet. The construction of executive condominium and introduction of schemes to allow the middle class to have easier access to commercial vehicles are some of the government’s initiatives to better serve the needs of the middle class citizens. The government has also been leveraging on information technology to minimize the costs of ‘consuming’ government services. An example is the use of the Internet to file tax returns. The cost of complying to tax rules has essentially reduced because taxpayers can file their tax returns at the comfort of their houses and offices. This is in contrast to the past where pages of tax forms are required to be filled up by the taxpayers. The use of Self-service Automated Machines (SAMs) to pay for bills and fines is another example.

 

Conflicts of interest between producers and consumers

It may be useful to begin this section by defining what the producers want. It is often assumed that firms aim to maximize their economic profit (economic profit is defined as revenue in excess of the opportunity cost of production). Wanting positive economic profit is a legitimate claim. The reason is simple. The entrepreneurs sacrifice their present consumption when they decide to set up their businesses. They put up their funds to set up the businesses to buy ‘hope’ in becoming economically better off in the near future. Accordingly, they are entitled to rewards following the risks that they take. Likewise, in the case of public listed companies, it makes economic sense to reward the shareholders with dividends and capital gains because of the risks that the shareholders have to face when they decide to place their money in the hands of professional managers. It is possible for the professional managers to lose the shareholders’ investment funds either intentionally or unintentionally thus subscribing the shareholders to risk (shareholders are also susceptible to liquidity risk, inflation risk and exchange rate risk). There is really nothing seriously wrong with the firms wanting to reap positive economic profit although the firms’ actions must be socially acceptable.

 

The firms’ desire to maximize their profit can be conflicting with the consumer interest. It is generally true that consumers demand value for money for the goods and services that they purchase (Garman, 2002). They want goods that are high in quality and lowly priced. This is on contrast to want the firms’ want. Firms generally prefer to sell their goods and services at the highest price possible. Of course, the strategy may not bring forth the intended revenue at least without first considering the product’s price elasticity of demand. Basic economic theory tells us that goods that are price inelastic generally fetch higher revenue if their prices are lowered. Offering higher prices to capture larger revenue will only work if the goods and services are price elastic. Measuring the item’s price elasticity of demand is useful as a result although estimating it is not easy in practice because of unavailability of data and measurement-related problems.

 

Firms are also less willing to spend their money to raise the quality of the goods and services they provide particular among firms that are myopic. Raising quality is not free. Inspection cost (like setting up the quality laboratory) and prevention cost (like inspection of in-coming materials and training of workers) are costly. The initial expenditures are incurred with the returns (if any) coming in only some years later. While their worry is founded, firms must be reminded about the possible cost savings because of higher quality goods and services provided to the consumers. Internal failure cost (like re-working the items and scraping of materials) and external failure cost (like loss of good will and legal expenses) can be reduced significantly with better quality products. Some quality experts claimed that firms have overlooked the prevention and inspection costs while seriously underestimated the savings that higher quality products can bring. The total cost of quality can actually be lowered if the firms place more emphasis in raising their products’ quality.

 

The quality of services provided could be seriously undermined because of the firms’ effort to raise productivity, which is defined as the ratio of output produced to the amount of input used. Firms are generally interested to raise productivity because of cost savings and higher profit that they can reap. But the consumer interest may not be met because of the resulted lower perceived quality. The reason being that attempts to raise productivity and quality can be conflicting. Financial institutions and cinemas for example may leverage on technology to allow mechanized telephone operators to answer customers’ queries.  Costs may end up lower. Productivity may go up. But customers are not necessarily happier with the service. They may end up spending longer time than before to get their queries answered. Worse, the customers may not be able to get their queries answered after going through the hassle. Part of the problem may be that some people are not very good at using the services. Consider another example. In schools, a teacher may be loaded with so many tasks that he/she does not have sufficient time to prepare well for his/her classes. While the person is more productive, the quality of his/her teaching deteriorates.

 

Usually, lowering of inspection and prevention costs of quality can negatively affect customers’ perceived quality although the company’s productivity may end up higher than before. Also, efforts to lower training cost and bonuses may create unhappy service providers who vent their anger and frustrations on the customers. Customers’ unhappiness is due to a lower perceived quality that can be problematic to the company in the medium to long term. I have deliberately used examples from the services to illustrate the trade-off between productivity and quality. The trade-off is less visible in the case of manufacturing because in manufacturing, changes in productivity can take place with the product quality remaining constant. It cannot be done in services because production and consumption occur simultaneously in service operations. Any attempts to alter service productivity can affect customers’ perceived quality and vice verse. The problem is compounded by the fact that services cannot be stored. If attempts are made to lower the number of service providers, it is not possible to ‘retrieve’ service providers during peak hours to address customers’ queries. Accordingly, raising productivity by cutting labour force in service organizations or increasing workers workload can adversely affect customers perceived quality. The customers may have to wait longer than before to be served. The service providers may treat their customers less ‘friendly’.

 

While the above discussion focuses on services, it does not imply that the discussion is irrelevant to manufacturing operations. The reason is simple. Manufacturing companies also offer services. Research, after-sales services and quality inspections are examples of services that manufacturing organizations provide. The distinction between manufacturing and services firms is therefore not very clear. A firm is usually involved in both manufacturing and services. Although the problem can affect all firms, it is not impossible to raise both the productivity and quality without sacrificing one or the other as my recent article has illuminated (Sam, 2004).

 

Earlier, I noted that consumers generally want full information about the producers, and the goods and services they sell. However, the information may not be forthcoming. Even if they are, it is difficult to ascertain whether the information revealed by the sellers is truthful or not. Producers may deliberately deceive the consumers with false information to tempt the latter to purchase their items. Usually, firms are only willing to reveal the minimum required information to the public either the consumers or the government. They are afraid that revealing too much may give than a disadvantage. For example, they fear that providing too much information gives the general public a reason to query them about the products they offer. Fortunately, this is changing. Firms are more willing to reveal information nowadays as compared to the past. The disclosure-based philosophy seems to dominate. Consumers determine the merit of reporting. Timely and relevant release of information to the consumers enables the corporations to retain current buyers and attract newer ones so that they can remain competitive and healthy in the globalizing world. Consumers are generally more demanding. They demand information so that more informed and rational choices are made. Failure among the firms to reveal adequately about them and the products offered in an easy-to-decipher manner can result in them losing business deals to their competitors. The beautiful thing about this development is that the government is not required to intervene as much as before (but a complete elimination is still not possible). Firms are more willing to be transparent and realize the benefits of being so.

This section shows that the potential conflicts of interest between the producers and consumers need not be as serious as some may have perceived. This is good news to the consumers because ultimately it is in their interest to purchase goods and services that they want at a reasonable cost and quality, while ensuring that the firms are rewarded accordingly because of the risk that they face. 

 

Conflicts of interest between the government and consumers

What constitutes public’s interest is difficult to ascertain because the public can consist of many individuals in the society whose interests can be conflicting. In reality, the government has the ultimate power to define what public’s interest really is. In this sense, the government can affect consumer behaviour and determine to what extent the consumer interest has been met since the consumers are part of the society.

 

The consumers generally want to have the freedom to choose how they wish to allocate their scarce resources. In reality, this is often not the case. The government for instance regulates the consumption of social bads and social goods. The government encourages the consumption of goods and services that can bring positive external benefit to the society while restricting the consumption of those goods and services that generate external cost. The consumption of cigarettes and alcohol for example is restrained through taxation and regulations (like restricting smoking in certain places and not allowing the purchase of alcohol after certain hours) because of the potential external cost these goods can impose on the society.

 

The government also fears the dominance of foreign culture to the extent that the local culture diminishes in importance. As a result, some governments have restricted the freedom of their people to purchase foreign goods through protectionist policies like imposition of tariffs and import quotas. They introduce policies to encourage the consumption of locally made goods. This is usually possible in relatively larger countries like Japan and Malaysia but difficult in smaller countries like Singapore (Singapore imports almost everything that she consumes and exports almost everything that she produces). The other reason for restricting the freedom to purchase foreign goods and services could be the desire to protect the local producers from competition with foreign sellers. Or the reason could be political in nature. This occurred in Malaysia when the government declared the ‘buy Australian goods last’ mentality after the political fallout between the then Prime Ministers of Australia (Paul Keating) and Malaysia (Mahathir Mohamad). In the presence of these initiatives, the consumers’ basically do not have the complete freedom to choose what to consume at least without having to incur higher expenses.

 

But one should not concur that such initiatives are outright bad. Recall that the government aims to maximize the society’s interest, not the interest of a few consumers. The policy to restrict consumption can be viewed positively at least from the society’s point of view if the policy can generate the greatest happiness to the greatest number of people, a view that is in tandem with the utilitarianism school of thought. Those who are negatively affected by the policy must accept the fact that their actions do bring about negative effects to the third parties. Sacrificing their freedom is worth it if the society benefits as a result of the restrictions. Because subjectivity is present in determining whose interest should take precedence, the quality of the government is an essential ingredient to make sure the society’s interest is the one that is being protected. In other words, the society must ultimately benefit from the government’s policies, not the policy makers and their cronies.

 

Usually, the consumers need the government to enact and enforce good rules which are aimed toward protecting their interest. In Singapore, one of the relevant legislations is the Law of Sale of Goods. The Sale of Goods Act imposes various obligations to the sellers even if the transaction does not explicitly state the sellers’ obligations to the buyers. The implied terms include the buyers’ entitlement to purchase goods of satisfactory quality (Section 14a), and that the good must be reasonably fit its purpose [Section 14(3)]. See Chapter 7 in Chandran (2002) for more details. Problems arise when the legislations are not properly enforced. For example, severe red tape can deter consumers from going through the proceedings to bring the culprit to justice so much so that they prefer to keep the problems to themselves. Possibility of corrupt judges and public authorities worsens the problem. If these are to occur in a country, the consumer interest is severely endangered because of the conflicting interest between those with authority and the consumers.

 

How can the authority’s interest be aligned with that of the consumers? It is useful obviously to cut red tape in facilitating proper workings of the legislations. In Singapore for example, claims relating to contracts of sale of goods can be heard in the Small Claims Tribunal which can settle claims that do not exceed S$10,000. It is relatively fast to resolve the conflict. Hearing can take place within a short period between one and two weeks. Going through the process in the Small Claims Tribunal is rather inexpensive as compared to mediation and litigation. For example, cases involving claims of up to S$5,000 in consumer sales, a fee of S$10 is charged and in the case of non-consumer sales, a fee of S$50 is charged. Also, no lawyers are allowed in the Small Claims Tribunal thus allowing the plaintiffs (buyers) to save on lawyer fees. Having such an avenue to settle disputes warns the sellers that they cannot take things for granted and do as they please. Consumers have an avenue to sue and demand claimants for any contract violations either in the implicit sense or explicit sense.

 

On the issue of corruption, proper checks can be introduced to lower the incentive and opportunity for corruption. Lessons from Singapore can be learned. Singapore is often touted by international ranking agencies as one the least corrupt countries in the world. It is useful to know that the Singapore government pays public sector officials salaries that are comparable to their counterpart in the private sector. The government continuously revise the public sector salary so that the wage gap between the public and private sectors does not get too wide. Enacting the Prevention of Corruption Act (POCA) has also helped. Enacted in 1960, the POCA replaced the less efficient legislation, the Prevention of Corruption Ordinance (POCO) which was enacted in 1937. The number of sections in the POCA was increased to 37 sections as compared to 12 sections in POCO. The legislation thus became more comprehensive than before. Furthermore, new laws were enacted to give more power to the anti-corruption agency in Singapore. Known as the Corruption Prevention Investigation Bureau (CPIB), the anti-corruption agency is an independent institution housed in the prime minister’s office where its director is answerable only to the prime minister, and its officers appointed by the President. The new laws give power to the CPIB officers to scrutinize the accounts of individuals working in the public and private sectors regardless of the positions they hold. The CPIB also has the authority to summon witnesses to court to assist in its investigations.

 

It is true that the government has the fiduciary duty to maximize the consumer interest. The government also has a duty to protect the producer interest. The government faces a dilemma. It cannot afford to ignore the consumers neither can she insists the producers to do whatsoever the consumers wanted them to. The latter essentially raises the costs of production to the sellers which can undermine their competitiveness. One possible solution to the problem is to allow market forces to determine the merit of one’s action. What the government needs to do perhaps is to enact and enforce legislations that protect the society (note that the term used is ‘society’, not ‘consumers’ nor ‘producers’). Cronyism and nepotism are commonly used terms to describe governments that have done otherwise.

 

Conclusion

Consumers are users of final goods and services. They contribute to the society by influencing and disciplining the firms and the government so that they react in certain ways that may ultimately enhance the consumers’ standards of living. Consumers also contribute to the country’s economy measured in terms of national income or national output. This paper identifies and briefly discusses the consumer interests and how they can be conflicting with the interests of the producers and the government. As a concluding remark, it may be worth noting that everyone is a consumer. Those who run the private corporations and public corporations are consumers. So are cabinet ministers and members of parliament. It may be useful thus for the professional managers and government servants to put themselves in the consumer shoes and ask ‘what is it what we want as a consumer’. The probability of better aligning their interest with that of the consumer can possibly increase as a result. This of course is beneficial to the country’s economy in general and the consumers in particular.

 

References

Chandran, Ravi (2002) Introduction to Business Law in Singapore. McGraw-Hill Book Co (Singapore).

Garman, Thomas (2002) Consumer Economic Issues in America. Seventh edition. Thomson Learning (United States).

Rodan, Gary (1996) ‘Class Transformations and Political Tensions in Singapore’s Development’, in Robison, Richard and Goodman, David (editors) The New Rich in Asia: Mobile Phones, McDonald’s and Middle-Class Revolution. Routledge (Great Britain).

Sam, Choon Yin (2004) Managing Productivity and Quality. (unpublished mimeo).