The Internet and the Future of Consumer Protection

In 1996, the Federal Trade Commission (FTC) held hearings on consumer protection, privacy and the Internet. This November, the FTC will hold new hearings on consumer protection, the Internet and globalization. To help prepare for those hearings, this paper puts forward a new framework for what the Internet means for consumer protection.

The current paper is the initial part of a larger research project. The goal of this project is to clarify a consumer protection regime that will help the Internet do well for consumers, businesses, and other stakeholders. We need to enhance consumer trust, help legitimate businesses flourish, and deter or punish illegitimate practices such as fraud and theft. A better Internet will promote economic growth, and also support individual creativity, a spirit of community, and political communication.

The framework uses the metaphor of “elephants” and “mice” to explain what is changed with the Internet. For large organizations, or “elephants,” the basic regulatory and enforcement process is much the same offline and online. By contrast, the Internet leads to many consumer harms caused by small actors, or “mice,” that hide from enforcers, often in nests outside the United States. To respond, consumer protection agencies will face an unprecedented need for international and technological capabilities, in order to catch the mice and reduce the harms they cause.

There are also three clusters of consumer protection issues that become much more salient with the rise of the Internet. The discussion here briefly describes those clusters:

1. “The Last Mile.” Consumers need to connect to the Internet to use it. Connectivity is a new utility, complete with the possibility of monopoly power that has long been a theme of utility regulation.

2. Personal information. Personal mainframes and high connectivity mean that information about named individuals flows in unprecedented ways. Major consumer protection issues arise for privacy, data security, and personal identity.

3. Consumers as producers. Equipped with a personal mainframe, an individual can often compete with industrial producers, or at least create content based on industrial production. Bloggers compete with newspapers. Home video hobbyists compete with movie studios, or at least can alter the original movies. The law has historically treated consumers and producers differently, but new rules will be needed when individuals have the computing power to be effective producers.

By understanding the differences in enforcement against elephants and mice, and by recognizing the three clusters of key issues, this paper provides an agenda for the 2006 FTC hearings, and a framework for understanding the changes in consumer protection brought about by the rise of the Internet.