Citation:

Simone Clemhout (1972) ,"", in SV - Proceedings of the Third Annual Conference of the Association for Consumer Research, eds. M. Venkatesan, Chicago, IL : Association for Consumer Research, Pages: 107-124.

Proceedings of the Third Annual Conference of the Association for Consumer Research, 1972      Pages 107-124

THE ECONOMICS OF "CONSUMERISM": CAN COLLECTIVE BARGAINING WORK FOR THE CONSUMERS?

Simone Clemhout, Cornell University

[The author is Associate Professor of Consumer Economics at Cornell University.]

THE WELFARE OF THE HOUSEHOLDS

Despite the rise of conventionally defined standard of living indicators (Nordhaus, 1971), the welfare of contemporary households is being jeopardized by a whole battery of factors. In response to such threats, the emergence of "consumerism" is trying to safeguard the individual households in their roles of consumers.

In the best of all possible worlds, classical economists believed that markets operate smoothly, allocating scarce resources to produce goods demanded by the households and the households in turn supply their labor services to the producers. Everything works well as if an invisible hand were keeping the merry-go-around going, with both the standards of efficiency and equity attained.

Soon it transpired that real-life producers exploit their monopsonistic powers in the labor market for their own profit. Both equity and efficiency standards are threatened. Worse still, low wage rates lead to inadequate effective demand and depressions imperil the very foundations of the free-enterprise economy. The rise of labor unions and the advent of management-labor collective bargaining appear to redress somewhat the power imbalance in favor of household as against firms. However, even then statistical evidences suggest that in many industries the U.S. work force is not earning product wage rates commensurate with the marginal products of their labor (Hildebrand & Liu, 1965).

Of late, various signals indicate that the households are still not doing well in their dealings with firms, many of these seem to exploit their marketpower in the form of-monopolistic power in the product markets. Again, both efficiency and equity are threatened to the detriment of households (in the capacity of consumers). Of course, institutions exist (e.g. Anti-trust laws) to curb the blatant application of monopolistic power. Nonetheless, the situation is far from satisfactory as witnessed by the rising politico-social tides of "consumerism" (Aaker & Day, 1971; Clemhout, 1971; Furuhashi & McCarthy, 1971; Gardner Jones, 1970; Mather, 1971; and Nadel, 1971).

In analogy to the management-labor relationship where collective bargaining worked reasonably well, one may well wonder whether the same collective bargaining approach can be fruitfully transplanted into the producer-consumer framework. What are the feasibility criteria, the drawbacks and the strengths of the collective bargaining approach in the present context, both in its own right and in comparison with the more traditional means of protection for the consumer? To understand the basic issues and to evaluate the alternative policy and institutional measures, we must first analyze the causal determinants of the welfare of the households. The socio-economic system surrounding the household is sketched in Chart 1 below:

As indicated at the bottom of Chart 1, the welfare of the household is affected by three elements:

1. the consumption basket

2. the working conditions

3. the environmental conditions

FLOW CHART 1

FACTORS DETERMINING HOUSEHOLDS' WELFARE

However, to trace the causal chains leading to these three elements, we shall start with the endowments of the households. These include labor services they possess and the cumulative savings they own. By entering the labor market and the financial/security markets, the households receive wage income and investment income. The combination of these two, becomes the household's income which is exchanged for the consumption basket in the market for goods and services. The labor market functions so as to regulate not only the volume but also the conditions of work. The consumption patterns of the household and the factory-and-product designs of the firms determine the environmental conditions. The expenditures of the households are spent not only on the consumption basket but also on health and education services. The environmental conditions not only affect the welfare of the households but also decide--in conjunction with health and education expenditures--the levels of health and education which in turn determine the quality of labor services which a given household can provide. It is now seen that the welfare of households depends upon the interaction of a system of socio-economic factors. It is against this background that we shall appraise the existing methods designed to resolve consumer problems and to investigate the potential of collective bargaining to resolve consumers-producers conflicts.

To protect the welfare of households, there exists already a broad spectrum of measures:

A. Indirect Measures

(1) To reduce the economic power of the firms--Anti-trust regulations, etc.

(2) To enhance the economic power of the households--Labor unions, Consumers cooperatives in purchasing.

B. Direct Measures

(1) General provisions

(a) Industry specific: the public regulation of utility industries

(b) Problem specific: the pure food-and-drug laws, the antipollution ordinances, etc.

(2) Special provisions--Damage suits by "victimized" households.

For reasons which will be made explicit below, the ensemble of the above institutions and provisions do not constitute an adequate, satisfactory shield to protect the welfare of the households.

EVALUATION OF EXISTING INSTITUTIONAL-POLICY MEASURES FOR THE PROTECTION OF CONSUMERS' WELFARE

In evaluating the alternative institutional/policy measures, we shall first propose three criteria:

(1) Efficiency versus Equity. The ultimate aim of public policy is presumably an equitable sharing of the economic benefits. While social equity should never be sacrificed on the altar of productive efficiency, likewise any desirable social system should not overlook the efficiency aspect in its pursuit for a more equitable distribution of economic welfare.

(2) Effectiveness. It is self-evident that any proposed safeguard for individual consumers must be highly effective in fulfilling its avowed aim.

(3) Viability. Any proposed system must be self-perpetuating if it relies upon the voluntary efforts of individual households.

Table 1 summarizes the comparative strengths of the various safeguarding methods for the consumer.

TABLE 1

At most, anti-trust policies in the past decade, have prevented the takeover of whole industries by monopolists. Oligopolistic firms (e.g., automobile, steel, petroleum industries) do not behave in a manner approximating the ideal of perfect competition. The volume of transactions of such firm is larger than that of consumers by several orders of magnitude. The uneven bargaining strength between buyers and sellers is glaring. On the other hand it is not efficient to reduce sufficiently the seller's market power by breaking-up firms enjoying economies of scale.

The other evident alternative is to substitute profit-motivated privately owned firms with public owned firms or public regulated firms as is done in a number of Western European countries. Not only such solutions are politically alien to the American social will, but judging from the performance of the limited number of U.S. industries which operate upon such basis, e.g., postal service, intra-urban public transportation, etc., there is serious question as to how low the productive efficiency will fall, once the private initiative and profit motive are removed from the system.

The time honored cooperative movement covers two areas of interest:

(1) in the distribution area, it exhibits limited success since we note that of the 3,647 million pounds of the British consumers' expenditure in the sear of 1970 only 15 percent are purchased through cooperatives (Nash, 1950).

(2) in the production area, few cooperative enterprises in this country over delve into such activities.

Presumably, the massive capital requirement and complicated technical know-how preclude consumer cooperatives to produce many commodities, e.g., automobiles, T.V. sets, solely for the consumption of their members. Perhaps their comparative advantage does not reside in the production of consumer durables, but products for current consumption like canned and frozen foods. We may therefore conclude that the cooperative movement need not provide an adequate answer.

Likewise, administrative and judicial measures are never likely to safeguard fully the interests of consumers. Who can decide that the price of a certain commodity should fall by how much in view of the latest technical innovation? How can we regulate the desirable durability of a product which arises out of the current fashion change? Major producers' abuses such as poor automobile designs which can be dangerous to drivers, can and should be rectified by legislation and ordinance. By ant large, the scope of such measures must necessarily be a limited one. Meticulous regulation is not only impractical but also threatens the efficient operations of the production sector.

THE COLLECTIVE BARGAINING APPROACH

Since the existing measures to protect the consumer have only partial impact and leave unsolved a range of issues we will consider how the collective bargaining approach can be useful in this area.

The prima facie desirability of the collective bargaining approach is supported by the following facts:

(1) The importance of the problems

(a) From the static point of view, on many consumption items, a sizeable portion of the consumer's dollar is spent on distributive services. For instance, of each dollar paid on household appliances, 30 to 404 go to the services of wholesalers, retailers, etc. Granted the middlemen perform their share of service, it is still questionable whether the prices for such services are simply too high.

(b) From the dynamic point of view, during the present anti-inflationary campaigns, often times the government cities the stabilization or "rolling back" of the whole-sale index as a sign of improvement, yet there has rarely been any fall of retail prices. Thus, it is the middlemen, rather than the consumer, who benefit from the anti-inflation measures. This can hardly be regarded as an acceptable state of affairs.

(2) The comparative advantage of the approach. The price determination mechanism in a free-enterprise society is as intricate as delicate clockwork. While there exists well-known and significant flaws of this mechanism, most of the present day policy measures are simply too blunt as instruments to rectify the aforementioned flaws. Since the malfunctioning of the system is the consequence of the massive market power concentrated in the hands of the sellers, it is the natural counter-measure for the households to consolidate their market power.

In the commodity markets, few commodities have no close substitutes. On the other hand, modern production technology is such that firms can hardly reorient their product lines without sizeable costs of adjustment. In principle, once "coalitions" can be formed among the buyers, the bargaining advantage of the producers will be threatened. Of course, the crux of the matter is the formation of bargaining coalitions among the buyers.

One may argue that the management-labor collective bargaining has a history of over a hundred years. Since the concept of producer-consumer bargaining is almost symmetric to the former, the failure of the latter to emerge is conclusive evidence that there exist unsurpassable difficulties for such an institution to materialize. While a scientific student will not rule out the validity of the conjecture, a priori, the logic of such reasoning is far from watertight. Most institutions are viable only under specific circumstances. Furthermore, there always exists a time-lag between a ripen socio-economic environment and emergence of a specific institution. we cannot use past history alone to preclude the possibility or desirability/feasibility of the producer-consumer bargaining in the near future under any form or for any sub-sector of our economy. It is for this reason that we engage in this economic analysis of the subject.

While the concept of coalition enjoys a predominant position in the theory of cooperative games, the usual game-theoretic discussion is on a more general and abstract plane. Hence, some tailor-made analysis is needed for our purpose. In principle the bargaining coalition can win concessions by two different means.

1. By playing one oligopolist against another

2. By threatening a monopolist with boycott

While casual observers may feel the first case is what one would expect, the economic interpretation of the case is by no means trivial. Suppose firm A is ready to make a given price-reduction to lure n buyers in a coalition to stop buying from firm B, it should be equally willing to make the same offer to n buyers who are not in one coalition. So all that a coalition can achieve is to help firm A in assessing the demand elasticity of a given commodity. Although this case may be of some real-life relevance, we shall not elaborate on this aspect of the problem.

Our analysis of the boycott is conducted through the following simplified model.

We shall derive five results:

(1) bargaining may improve both equity and efficiency

(2) bargaining can improve equity and efficiency, but not to the extent of either abolishing the monopolistic profit or the deadweight loss

(3) massive defection of the members of the bargaining coalition may reduce the collective bargaining approach to ineffectiveness

(4) contrary to the intuition of many, the defection of some of the members from a coalition need not induce a stampede for abandoning the coalition

(5) the potential gain from the bargaining approach may vary from situation to situation

Consider the case where we have one seller and n identical price taking buyers; each individual's demand curve can be depicted as dd' on Figure 1. For n given price this graph shows three areas of interest: the consumer surplus, the monopolistic profit and the dead weight loss. The bargaining feasibility frontier relevant for our analysis is determined by tracing out a curve representing the trade off between consumer surplus (the payoff for the buyer, rb) and monopolistic profit (the payoff for the seller, rs) as the sales price varies. This is shown as FF' in Figure 2.

Elementary price theory indicates that if the sales price is anywhere above the marginal cost a dead weight loss occurs. In fact, it may be shown that by making side-payments from the buyers who purchase at marginal cost to the seller it is possible to obtain a higher frontier FF'' denoted as Paratian frontier-true. The horizontal distance between FF' and FF'' represents the dead weight loss. Figure 1 depicts a special example where the demand curve of the representative buyer is linear and the marginal cost, equals the average cost, for the firm is a constant a > o.

FIGURE 1

FIGURE 2

The monopolist would maximize his profit by setting unit price = M which induces each buyer to purchase q1 units. This gives rise to a monopolistic profit of ceaM (in Figure 1) which equals o dollars (in Figure 2) and a consumer surplus of cMd (in Figure 1) which equals B utils (in Figure 2).

Collective bargaining does not involve side-payments but aims at improving the terms of trade for the buyers. However, any successful bargaining implies the reduction of the sales price, accompanied by both the reduction of the monopoly profit and the reduction of the deadweight loss. Should price be reduced from the monopolistic price M to a', the monopoly profit will fall from Maec to a'ab''b' and the deadweight loss will fall from ceb to b'b''b. Hence both efficiency and (presumably) equity improve with successful bargaining. This justifies result a. We can now consider the limitation of the collective bargaining approach. The setting up of a bargaining unit implies an overhead cost w in terms of utils. If there are n' < n buyers participating in the bargaining coalition this would impose a cost of w/n' utils.

The incurring of such cost shifts horizontally the FF' locus to the left since no bargaining coalition wishes to force the seller out of business. At most the maximum payoff for each coalition buyer can be (F - w/n) i.e. if every buyer joins the coalition so that the apportioned overhead cost per buyer is reduced to the minimum. This gives rise to a new frontier ff' with the maximum attainable payoff for each buyer - f utils

where fF = w/n

If there are some buyers absenting themselves from the coalition, the heavier overhead cost per person will shift the feasible payoff frontier further to the left to a position like 44' and WW'. It now becomes clear that no coalition is worthwhile to pursue if the potential increase of the consumer's surplus for each person is not more than w/n.

If the seller wishes to headoff the formation of any bargaining coalition on the side of the buyers, all he has to do is to cut the sales price to a + x (in Figure 1) for some x. [The calculation of x is as follows: In Figure 1, the most each consumer can hope for is to force the seller to sell at cost, a. The maximum attainable increment of his consumer surplus is the area of the trapezoid aa'b'b, i.e.,

Area of the trapezoid EQUATION

On the other hand, the minimum apportioned cost is EQUATION

then. there cannot be any coalition. Solving for x from the above equation: EQUATION

Since a + x < d (otherwise, quantity of output = d'/d (d-a-x) < 0): EQUATION]

Even if all the n buyers form a coalition, none of them can ever hope to obtain a consumer surplus beyond what they can already achieve under the current unit price a + x.

In Figure 2 by constructing a vertical line from f to g on the FF' frontier and then constructing horizontal line gg' we can immediately deduce the minimum attainable monopoly profit og' and the minimum irreducible dead weight loss bb'b''. This substantiates result b above. As a corollary to the above analysis, the smaller is the coalition, the higher will be the apportioned overhead w/n and the more to the left will the feasibility frontier recede. No coalition is worthwhile to pursue if the size of the coalition is so small that the feasible payoff frontier moves to the left of B, namely the consumer surplus which one can obtain anyway under monopoly.

Consequently, it is desirable that the benefit or concession obtained by the bargaining coalition from the sellers be restricted only to the members of the bargaining coalition - no free riders can be allowed to benefit otherwise there may be a universalurge for buyers to absent themselves from the coalition to the point where the coalition shrinks below the minimum survival size, i.e., the feasible payoff frontier retreats to the left of point S.

We now turn to a phenomenon akin to the free riders who dodge the apportioned overhead cost: the defectors who withdraw from a boycott campaign. The former cuts the financial ground from under a bargaining coalition; the latter cuts the real-politic ground from under a coalition in "a state of economic war".

Now in order to force the monopolist seller to make any concessions at all in decreasing its profit below * effective and creditable threats must be presented to the monopolist. In the present context which is collective bargaining without external intervention the only available means is boycott.

We first observe that point o in Figure 2 represents the payoff for both seller and buyer when there is no trade.

In a boycott situation the monopolist loses some or all of its sales while the boycotters must bear not only the loss of consumer surplus but also the necessary expenditure of resource to launch and sustain the boycott campaign. Assuming that n is large a one person boycott would only decrease the monopolistic profit by an iota from the maximum monopolistic profit *. On the other hand with the decrease of the number of boycotting buyers the per person boycotting cost due to organization costs also shrinks towards zero. The payoff locus under boycott is traced out by varying the number of boycotters, it is the curve shown in Figure 2 as defection line. It can be expected that the monopolist seller will make little concessions toward an ineffective boycotting group.

It is also obvious that without the hope of simultaneous action taken by other buyers few individual buyers will launch any boycott at all.

It is the coordinated, organized movement which will sustain the individual urge to boycott. It is also the likelihood of mobilizing a sizeable portion of its membership in a boycotting showdown which can impart any modicum of creditability to the threat of a bargaining unit. All these remarks support our result c.

Since any member in the bargaining coalition may defect in a boycott, one natural question is can the collective bargaining approach ever work for the consumer? In comparison with the situation of labor disputes, it takes picket lines, the exclusive practice of union shops, etc. to knit the union members into a coordinated body in strikes. Consumers have little likelihood to develop similar institutions to back up any boycott. But without boycotts, how much bargaining power to bargain with will the bargaining unit retain? To evaluate the strength of such views, we shall consider the problem through the concept of Nash-equilibrium for non-cooperative games.11 While the coalition problem deals with the cooperative concept, the more fundamental issue of to-join or not-to-join can best be studied along the lines of non-cooperative games. (As Nash noted, noncooperative games lie at the foundation of cooperative games.)(Nash, 1953).

Assuming there exists no external enforcing means against defection, then each coalition member must weigh the consequences of defection or non-defection. In general, the defecting member can dodge the burden of participating in the boycott, i.e.: the abstention from trade and the direct boycott cost (organizing, etc.). On the other hand, the act of defection may affect the outcome of the boycott and even the defecting members still want to enjoy the fruits of a successful boycott - a favorable subsequent settlement. Therefore, those members believing that their own participation of the boycott is non-consequential may defect. Others who are convinced of their potentially pivotal role in the final outcome will persevere in the boycott movement. While the possibility of defection weakens the stand of a boycott, it does not necessarily doom such movements to failure, defections notwithstanding. The following example illustrates the situation.

Let n' be the number of buyer in the bargaining coalition calling a boycott.

n" < n' be the number of non-defecting members required to make the boycott a success. although all n' persons will benefit from the boycott.

p1. p2, p3 and p4 are the expected payoffs with p1 < p2<p3 < p4 as shown in the following matrix:

Payoff             Boycott successful         Boycott unsuccessful

Defecting                p4                                         p2

Nondefecting          p3                                         p1

(m, n' - m), with 0 < m < n', stands for the defection/non-defection split within the coalition.

Considering now the defection/non-defection as the only two strategies open to all coalition members, it can be shown that the Nash-equilibria are of the following two types: (n'', n' - n'') and (o, n').

The moral is: while it may be difficult to initiate a non-defecting subcoalition to effect a successful boycott, once a "critical mass" of boycotters have committed themselves, they will stay on to win the issue, even though there are free riding defectors who reap the benefit but dodge the burden of a boycott. In short, there is no intrinsic reason why the failure to punish free riding defectors will prevent a successful boycott from being launched. The above analysis validates our conclusion d.

A three-person special case of the above example is depicted on Figure 3 where the integers 0 and 1 stand respectively for defection and non-defection and it takes two members to organize a successful boycott. The eight vertices are assigned with ordered triplets of payoffs to the three players of the game and any arrow sign-between two vertices shows how one unstable "split" tends to transform into another "split" be it stable or unstable.

Conclusion e is rather self-evident. The outcome and benefit of the bargaining process varies from case to case. Our Appendix sketches how these variations affect the result of bargaining under the Nash bargaining model (Nash, 1950).

FIGURE 3

SOME SPECULATIVE COMMENTS

What circumstances favor the collective bargaining approach most? From our theoretic analysis. it seems that the following criteria are important:

(1) The strength of group-identification on the side of consumers. This factor predicts how extensively the bargaining coalition can control the buyers' actions whether to join the coalition or to launch a boycott.

(2) The importance of a commodity in the consumer's budget. More likely the consumers will be highly motivated for action regarding important commodities.

(3) Substitutability of the boycotted product. The higher is the elasticity, the easier it is to sustain the no-trade situation under a boycott.

(4) The shiftability of supply. This reflects the power to resist pressure on the side of the sellers. If the shiftability is low, then the seller is not likely to face a bargaining coalition with much resolve.

Social goals can be achieved through collective bargaining which go beyond the hope of traditional Pigovian welfare economics which regards the lowering of monopolistic prices as always desirable since this increases the consumers' surplus. Today equitable income and wealth distribution is regarded as too uneven and, if, due to practical difficulties (e.g. in formulating and passing the appropriate legislation, in administering the required programs, etc.), one cannot have effective and appropriate means to rectify the situation, there is every justification for the disadvantaged, the needy and the poor to improve their economic status through the coordinated utilization of their inherent bargaining power. Such groups of individuals may include the low-income pensioners, the ghetto residents, those populating the economically depressed regions and perhaps part of the student population who cannot quite utilize the financial institutions to tap their prospective earning power through long-term loans.

What are the institutional set-ups around which the collective bargaining units may be found? Taking a leaf out of the history of industrial organizations, it seems it is much easier for the established institutions to take over new functions than for new institutions to be established solely for the purpose of carrying out these new functions. The ready-made constituency for the bargaining coalition, the pre-existing staff and organization which may well have excess capacity to be explored and the high motivation of the membership backed by years of history. If the above observations are correct, then presumably existing labor unions, urban ghetto organizations, students' associations, consumer cooperatives can become the springboard of collective bargaining campaigns (Jackson & Taylor, 1969).

APPENDIX

FIGURE 4

REFERENCES

Aaker, D. A. & George S. Day. Consumerism: Search for the Consumer Interest. New York: The Free Press, 1971.

Clemhout, Simone. Consumer Disaffection: Time to Bargain? Human Ecology Forum, 1971, 2.

Furuhashi, Y. H. & McCarthy, E. J. Social Issues of Marketing in the American Economy. Columbus, Ohio: Grid, Inc., 1971.

Gardner Jones, M. Wanted: A New System for Solving Consumer Grievances. Arbitration Journal. 1970, 25, 234-347.

Harsanyi, J. C. & Reinhard Selten. A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information. Working paper No. 285, Center for Research in Management Science, University of California, Berkeley, October 1969.

Hildebrand, G. H. & T. C. Liu. Manufacturing Production Functions in the U.S. 1957. Ithaca, New York: Cornell University Press, 1965.

Jackson, Samuel C. & Warren L. Taylor. Center for Dispute Settlement - A New Use for an Old Tool. Legal Aid Briefcase, February 1969, 130-135.

Luce, D. R. & Howard Raiffa. Games and Decisions: Introduction and Critical SurveY. New York: John Wiley and Sons, Inc., 1957.

Mather, L. L. (editor). Economics of Consumer Protection. Danville, Illinois: The Interstate, Printers and Publishers, Inc., 1971.

Nadel, Mark V. The Politics of Consumer Protection. New York: Bobbs-Merrill Co., Inc., 1971.

Nash, J. F. Non-Cooperative Games. Annals of Mathematics. 1951, 54, 286-295

Nash, J. F. Two-Person Cooperative Games. Econometrica. 1953, 21, 128-40.

Nash, J. F. The Bargaining Problem. Econometrica. 18, 1950, 1955-1962.

Nielsen Reports. Co-ops Retain Share of Grocery Trade. Cooperative Management and Marketing. 1971, 4, 33-35.

Nordhaus, W. GNP and the Quality of Life. Presented at American Academy for the Advancement of Science, Boston, December 30, 1971.

----------------------------------------