24 December 2020

Consumer Activism

'Consumer Activism: From the Informed Minority to the Crusading Minority' by Yonathan A. Arbel and Roy Shapira in (2019) 69 DePaul Law Review 233 comments 

Legal scholars have long recognized that market norms are respected not only because of consumer protection laws, but also because of internal market dynamics. Consumers, the argument goes, fend for themselves and hold sellers accountable. But how exactly do consumers discipline sellers? The most influential model has been the informed minority theory, according to which a critical mass of informed consumers reads and negotiates contracts in advance, thereby pressuring sellers to offer better contracts to all consumers. Recent empirical studies, however, cast doubt on the existence of such a mass, leading many to view the informed minority theory as unrealistic. What, then, may explain bottom-up governance in a world where consumers do not read contracts? In this contribution to the Clifford Symposium, we aim at exposing a different mechanism of market discipline: one that works not through ex ante readingand negotiating, but ratherthrough ex post pressuresto meet buyers' expectations. We specifically emphasize the role of a small subset of consumers that we dub "nudniks." Nudniks are those consumers who call in to complain, fill out satisfaction surveys, post online reviews, and file lawsuits. Driven by an innate sense of justice and atypical motivations, these nudniks act as crusading consumers against underperforming sellers. Through their actions, nudniks direct attention to seller failure, leading to a variety of formal and informal sanctions, thus presentinga more realisticform of consumer activism in today's overwhelming information environment. 

Market discipline comes not only from legal protections, but also from consumers themselves. Understanding the effectiveness of consumer-driven market discipline mechanisms is key, as it dictates the scope and design of legal interventions. 

The leading theory of market-based discipline has traditionally been the informed minority theory.' The theory concedes that most consumers lack sophistication or time to read their contracts and shop for better terms. Yet, it suggests that consumer-based governance of market discipline can be powerful. As long as a minority of consumers are engaged with these aspects of the transaction, one could still expect sellers to provide favorable terms. Sellers would compete over who wins the segment of informed buyers, and in the process will have to modify their standard form contracts in ways that benefit the entire consumer body, or so the theory goes. While enjoying large influence, over the years, the informed minority theory has encountered increasing opposition. Perhaps most critically, recent empirical evidence suggests that the number of consumers that actually read and understand contracts is too low to justify a change in sellers' behavior. Even the theory's progenitors now seem to question its practicality. This has left a gap in our understanding of market discipline through consumer governance: If market discipline does not come from a critical mass of informed readers, where does it come from? 

This Essay suggests looking elsewhere: Instead of focusing on buyers who read and negotiate before the purchase, focus on buyers who feel compelled to respond strongly whenever sellers disappoint. Instead of focusing on avid readers, focus on avid "enforcers" - those consumers who demand to speak with the manager, fill out satisfaction surveys, post online reviews, and file lawsuits. We dub these consumers "nudniks." Nudniks do not operate like most of us. They possess an innate sense of justice, atypical motivations, and an idiosyncratic cost structure, which lead them to fight sellers who disappoint - even in situations where most of us would not notice, or notice and stay passive. Nudniks are often perceived as petty and vindictive. Yet, through their actions, nudniks provide an important public service: directing attention to failures in the market, thus leading to a variety of formal and informal sanctions against misbehaving firms. In other words, nudniks generate underappreciated spillover effects that reverberate throughout the economy. This Essay explores the role of nudniks in the enforcement of market norms and consumer governance, evaluates their social contribution, and suggests this "crusading minority" of nudniks as a missing piece in theories of consumer market governance. 

This Essay argues that consumer activism predicated on a crusading minority of nudniks, who notice seller misbehavior and respond to it through legal-reputational channels, is a more realistic depiction of how market discipline works than the informed minority theory. Nudniks complain and fight sellers publicly regardless of whether they read the contract in advance. They often complain based on their transactional expectations from the seller. And transactional expectations are a function not only of the explicit terms in the contract, but also of sellers' oral representations, advertisements, market norms, fairness standards, and so on.8 Even if the seller is contractually protected by a disclaimer nestled in the fine print, she will anticipate the potential risk that comes from entering a public battle with nudniks and may find it best to deliver better service ex ante. 

Such a nudnik-driven mode of consumer activism creates positive spillovers, but also comes with social costs. Some nudniks pursue narrow interests that do not benefit the rest of the consumer body and impose unnecessary costs on sellers. While we do not venture to offer a conclusive quantification of the net effect of nudniks, we do offer here a synthesis of findings from the consumer complaining behavior literature, suggesting that many nudniks positively contribute to the market. At the minimum, our analysis suggests that legal scholars and policymakers should pay more attention to nudniks' effects. 

The nudniks are a response to the problems with the informed minority theory. This theory essentially rests on two assumptions, regarding the what and the how of seller behavior. First, what sellers do: The theory assumes that sellers compete over a small segment of consumers who read the contract and care about its terms. Second, how they do it: To win the segment of readers, sellers have to offer better terms to all consumers across the board. Sellers operate through standard-form contracts, and cannot tell which consumer is a reader and which is not before the fact; therefore, they are forced to offer better terms for all. In this Essay, we respond to the first premise. Many have taken the recent empirical evidence of low readership rates to as undermining the possibility of internal market discipline. This Essay suggests that market discipline does not have to be predicated on consumers reading the contract before purchasing; it can also come from consumers noticing and complaining publicly about sellers who fail to meet consumers' transactional expectations, regardless of the contract. In a separate paper, we confront the second assumption of the informed minority theory: the premise that sellers cannot distinguish between active and passive consumers. In today's world, we ar- gue there, sellers can, and to a growing extent already do, employ big data tools to tell which consumer is most likely to be nudnik, and then cater to these consumers personally. 

This Essay proceeds in three parts. Part I explores the leading theo- ries of market-based, consumer governance mechanisms and their shortcomings. Part II suggests a new direction for thinking of market- based consumer governance. Instead of counting how many consum- ers read contracts, we need to shift attention to consumer dissatisfaction behavior: How many consumers complain after the purchase? How do other potential consumers react to these complaints? What impact do such complaints have on sellers? We emphasize the rise of the internet and social media as factors that greatly empowered nudniks and increased their potential reach. As long as sellers are un able to spot nudniks in advance,10 they are incentivized to provide higher-quality service to all consumers ex ante, so as not to risk the reputation and legal risk that comes with nudniks. Part III evaluates the shortcomings of nudnik-based activism. We conclude that while not all nudnik-activity is socially beneficial, overall there is reason to believe that nudniks are the unsung heroes of market governance.