The Situationist

Posts Tagged ‘Elizabeth Warren’

Tamara Piety on Market Manipulation

Posted by The Situationist Staff on September 18, 2010

In response to Adam Beneforado’s terrific post this week, “Breaking Up Is Easy to Do: When Corporations Dump Consumers,” Situationist friend Tamara Piety wrote another excellent comment, a portion of which we’ve posted below.

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To me, one of most offensive examples of this type of channeling is the price discrimination practice involved in rebate/coupon schemes. Rebates and coupons are used as a way to expand the customer base by attracting a few more customers by virtue of the illusion (for most) of a lower price point. We see it in electronics all the time – “Laptop $999 [with $250 rebate]” There are several things at work here at once. One is that the seller ( or whoever actually pays the rebate) has your money for some period of time ranging from 30 days to 6 months as an interest free loan. Second is the anchoring effect that makes $999 seem some how much less than $1,000. But the principle objection for me is that they are actually creating a staggered pricing program. Again, this might not be a problem if it simply involved selling to as many customers as possible on the basis of the price that they will want to buy. The problem is that in order to do this companies make the process of obtaining the lower price (i.e. the with the rebate price), much more onerous than it appears to be through a variety of devices that are intended to take advantage of the psychological effect of the lower price and then relying on consumer inertia, lack of attention, recalculation of the efforts and so forth to avoid actually making good on that promise. Getting the rebate usually involves fair amount of time and effort (filling out the rebate form, mailing it back, waiting for the check, etc.) and uncertainty (if you fail to observe deadline, miss a requirement in the fine print, fail to send in the original, etc.) you lose. None of these difficulties are simply bureaucratic obstacles which have the ancillary effect of depressing the number of rebates redeemed. They are intended to have this effect. And sometimes the rebate is “paid” in the form of a “gift card” rather than in a cash or check which further draws out the redemption process by providing an expiration date for the card, limitations on where it can be used, or even a restriction limiting its use to other products from the same seller.

Every single step in this process is calculated to generate some failures to complete the redemption process so that the customer doesn’t actually receive the advertised price. And this is seen as a perfectly legitimate set of strategies to maximize the sales of the same good across a range of consumers – from those who don’t care about the rebate, to those who do and intend to redeem and then fail to do so, to those who intend to try redeem and try to do so but fail to successfully jump through all of the hoops of the conditions imposed, to those, finally, who intend to redeem and successfully do so. Some percentage of the last three groups are consumers who presumably wouldn’t have brought the product but for the promised (but in at least two instances) undelivered rebate. And the difference between groups 2 and 3 and group 4 are explained by the seller as being entirely attributable to some character “flaw” (lack of attention, lack of diligence, etc.) or a “choice” not to redeem when that “choice” has been structured to take advantage of consumers’ psychological vulnerabilities (or their dawning realization that the time and effort required to pursue the rebate is not really “free” and thus it might be more rational to abandon the effort.) It is disingenuous and unfair to describe these consumer “choices” as unmediated.

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Bottom line all these tropes – “control,” “choice,” “information,” as they are currently used and understood by many, operate to absolve the seller of any responsibility for their role in driving these choices even as several full-blown, mature industries’ very existence (advertising, marketing, PR) is predicated on the proposition that it is possible to manipulate and channel consumer choices. It is a feat of sleight-of-hand to argue (in essence) that entire industries’ efforts are of no consequence whatsoever even as billions of dollars are spent in plain sight on those efforts.

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To read Piety’s entire comment, click here. Her focus is particularly timely in light of the fact that another Situationist friend, Elizabeth Warren, accepted President Obama’s invitation this week to set up a a consumer financial watchdog and warned yesterday that the time for financial “tricks and traps” was over.

The themes of market manipulation and the “choice myth” are common on the Situationist.  In addition to the sample of related posts linked at the bottom of Adam’s post,  here are few more:  Taking Behavioralism Seriously (Part I) – Abstract and Top Ten List; Promoting Smoking through SituationThe Big Game: What Corporations Are Learning About the Human Brain,” “Warren on the Situation of Credit,” “The Financial Squeeze: Bad Choices or Bad Situations?,” “No Contract for Old Men,” The Situation of Subprime Mortgage Contracts - Abstract.”

The first scholarly article (part of  a trilogy) devoted to these issues is Taking Behavioralism Seriously: The Problem of Market Manipulation (74 N.Y.U.L. Rev. 363 (1999)) available for free download on SSRN.

Posted in Behavioral Economics, Choice Myth, Life, Marketing, Public Relations, Situationist Contributors | Tagged: , , , , , | 1 Comment »

Warren on the Situation of Credit

Posted by The Situationist Staff on July 5, 2008

Image by The Consumerist - FlickrFrom the Harvard Law School Website.

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Harvard Law School Professor Elizabeth Warren was recently featured on the NPR program “Fresh Air.” During the show, Warren spoke extensively about the intricacies of the credit system, including how lenders, employers, and even cell phone companies are using credit ratings to determine an individual’s purchasing power.

Host Terry Gross opened the program by describing how several egregious clerical errors in her husband’s credit report lowered his credit score extensively, and asked Warren how these errors can occur.

“It happens because there’s no real check on the system,” Warren said. “Estimates are that about 80 percent of credit reports contain at least one error, and one in four credit reports contain errors big enough to make a difference in your credit rating.”

An expert in bankruptcy law, Warren writes about bankruptcy and credit issues facing middle-class Americans. She has recently called for the creation of a financial products safety commission, which would regulate credit products in the same way the government regulates other consumer goods. Warren is the author of The Two Income Trap: Why Middle-Class Mothers and Fathers are Going Broke . . . .

Listen to the interview of Warren, here.

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For a sample of related Situationist posts, see “The Situation of the Mortgage Crisis,” “Financial Squeeze: Bad Choices or Bad Situations?,” “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Posted in Life, Podcasts, Public Policy | Tagged: , , , , | 2 Comments »

The Situation of the Mortgage Crisis

Posted by The Situationist Staff on May 12, 2008

Image by gruntzooki - Flickr

Economist Robert Frank recently wrote an editorial for the Washington Post, titled “Don’t Blame All Borrowers,” in which he questions Senator McCain’s recent statement regarding possible that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” Frank takes a more situational perspective. We excerpt portions of his argument below.

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[W]hile Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.

Hints of how things began to go awry appeared in “The Two-Income Trap,” a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.

It’s easy to see why. Even in the 1950s, one of the highest priorities of most parents was to send their children to the best possible schools. Because the labor market has grown more competitive, this goal now looms even larger. It is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: To gain access to the best possible public school, you had to purchase the most expensive house you could afford.

But what works for any individual family does not work for society as a whole. The problem is that a “good” school is a relative concept: It is one that is better than other schools in the same area. When we all bid for houses in better school districts, we merely bid up the prices of those houses.

In the 1950s, as now, families tried to buy houses in the best school districts they could afford. But strict credit limits held the bidding in check. Lenders typically required down payments of 20 percent or more and would not issue loans for more than three times a borrower’s annual income.

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the intervening decades. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Those who condemn them see a different picture. They see undisciplined families overcome by their lust for cathedral ceilings and granite countertops, families that need to be taught a lesson.

Yet millions of families got into financial trouble simply because they understood that life is graded on the curve. The best jobs go to graduates from the best colleges, and because only the best-prepared students are accepted to those colleges, it is quixotic to expect parents to bypass an opportunity to send their children to the best elementary and secondary schools they can. The financial deregulation that enabled them to bid ever larger amounts for houses in the best school districts essentially guaranteed a housing bubble that would leave millions of families dangerously overextended.

Congress should not bail out speculators and fraudulent borrowers. But neither should it be too quick to condemn families that borrowed what the lending system offered rather than send their children to inferior schools.

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To read the entire op-ed, click here. For a sample of related posts, see “The Financial Squeeze: Bad Choices or Bad Situations?,” “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Posted in Choice Myth, Education, Public Policy | Tagged: , , , , , | 1 Comment »

 
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