The Two Faces of Electronic Commerce

Date:
By: 
Thomas B. Leary, Former Commissioner

Introduction

Electronic commerce on the Internet, or "e-commerce," is a subject of compelling public interest. Billions are invested in reliance on its growth potential, the media are blanketed with stories about it, and it is the dominant theme in numerous conferences of business people and lawyers. Yet, the volume of consumer transactions on the Internet (as opposed to business-to-business transactions) is still relatively small,(2) and no one really knows whether its immense potential will be fully realized.

The problem is that consumers view the Internet with fear as well as fascination. There are certain special characteristics of the medium - - favorable and unfavorable - - that contribute to this ambivalent reaction. This talk will discuss three of the characteristics that seem particularly important, and will pair the pros and cons in a way that may make them easier to remember.

1. Sellers can readily gather a great deal of information about buyers, without their knowledge. This makes it possible for sellers to respond efficiently to consumer demand but it also heightens consumer concerns about privacy. In this sense, the medium is uniquely informative but also uniquely intrusive.

2. Sellers can communicate with buyers virtually without cost. This facilitates almost instantaneous and low-cost competitor entry but also makes it more difficult for consumers to feel confident about the integrity of the sellers. In this sense, the medium is uniquely accessible but also uniquely anonymous.

3. The e-commerce medium knows no national boundaries. This makes it possible for buyers and sellers to enjoy the benefits of a global marketplace but also raises difficult questions about where and by whose rules the inevitable disputes should be resolved. In this sense, the transactions are both everywhere and nowhere.

At the moment, the privacy issue attracts the most attention and is the focus of various legislative proposals, but other issues are potentially just as important. The ultimate government response to these various issues is still uncertain, and I will not try to predict it. A closer look at each of these special characteristics, and the issues they raise, suggests that the private sector will have a large role to play, whatever governments do or do not do.

Elaboration of the Issues

1. Informative and Intrusive

There is nothing new about the accumulation of information about buyers in order to facilitate future marketing efforts, either by the seller in a particular transaction or by others with whom the seller shares information. Many of us are flooded with catalogues both from stores where we have charge accounts and from other retail establishments that we may never have dealt with before. Even a contribution to one particular charity can unleash a flood of additional appeals from that charity or from others with a similar focus. Obviously, some of our purchasing habits and our particular interests are a matter of record and available (usually for a price) to anyone with a use for them.

This gathering and sharing of consumer information may be a source of considerable irritation but it also confers considerable benefits. So-called "target marketing," based on information about individual consumer preferences, greatly reduces selling costs and ultimately can lead to lower consumer prices. Until very recently, the phenomenon did not give rise to much public or political controversy. The target marketing potential of e-commerce, however, has generated a firestorm.

One reason is that e-commerce is so much more informative and intrusive than other methods of doing business. Internet technology not only provides a record of consumers' actual purchases but information about their decision-making processes as well. It is as if you could follow consumers through a supermarket and record not only the products they actually bought but also the other products that caught their eye. A closer analogy might be close observation of a customer while browsing in a bookstore as well as while paying for purchases on the way out. In fact, the technology is even more intrusive because consumers can be observed in the privacy of their homes, while they are not "shopping" for anything but simply indulging their curiosity in ways that they might not like to become known. This is much richer information for target marketing but it also seems much more threatening. People have visions of a "Big Brother," prying into their private business.

For some of us, these fears appear exaggerated. Privacy expectations are highly subjective and vary with time and place. A consumer who surfs the net today, in the anonymity of a city apartment house, probably still enjoys far more privacy than a dweller in a small town 100 years ago, where everyone knew everyone else's business. In Jane Austen's world, almost 200 years ago, people's financial affairs were an open book and their love affairs a closed one; today, the opposite seems to be true. I am old enough to remember a world without antibiotics, when the infectious diseases of childhood were life-threatening. Whenever a child caught one, a representative of the local board of health would nail a big WARNING sign on the front door of the child's house, so that people would not unknowingly be exposed to the disease. Imagine the uproar today if comparable steps were taken to contain the spread of serious diseases that we do not know how to cure.

Moreover, there is already an immense body of data available from non-Internet sources. It is not clear that the incremental information developed by the special surveillance capabilities of the Internet will be exploited to cause extensive consumer harm.

Exaggerated or not, however, concerns about Internet privacy have become a major political issue. As with many political issues, there is a self-reinforcing feedback mechanism at work. People's worries are picked up by the media or communicated directly to political representatives. These representatives understandably respond by voicing their own concerns, and their statements are also picked up by the media. Then people who may not yet have thought much about the issue also become worried, and so on and on, until some representatives begin to believe they have to do something - - anything - - to deal with it.

At the moment, about 50 pieces of legislation have been introduced in Congress to address privacy issues. The number is expected to grow and, of course, there are a substantial number of bills at the state level. Without commenting on any particular proposals, it is safe to say that whatever Congress does or does not do, there will be a continuing need for private initiatives.

2. Accessible and Anonymous

Although privacy concerns are on the forefront today, there are also other special characteristics of e-commerce that consumers are worried about and that the private sector, in particular, will have to address.

E-commerce has been hailed as an almost costless way for new entrants to market their wares, provide intense competition, and reduce prices. The truth is somewhat less dramatic. Unlike mail order or telephonic marketing, which require a considerable investment to reach large numbers of people, the Internet does make it possible for both new and old competitors to communicate with customers at zero marginal cost. But, these competitors may still have to spend a great deal of money actually to provide goods and services to these customers. Inexperienced sellers, in particular, may be surprised and overwhelmed by the response to their solicitations, and are then poorly prepared to follow through. We are already beginning to see enforcement proceedings that arise because it is so much easier to make promises on the Internet than to keep them.(3)

These enforcement proceedings illustrate both the promise and the challenge of e-commerce, and the reasons why consumers are wary. The medium is uniquely accessible and anonymous. Polls show that privacy is the number one concern, but large numbers of regular Internet users say they still would not make significant purchases through the medium even if their privacy concerns could be met. They are worried that if they do not know who they are dealing with and do not feel confident that they will get what they have paid for.(4) The proliferation of new entrants, which should expand product variety and reduce prices, brings problems of its own.

The issue is particularly serious because e-commerce lends itself so readily to one-time promotions, where inaccurate information is not subject to normal market disciplines. A competitive market should promptly discipline neighborhood stores or service providers that do not deliver the quality they promise, and this helps to keep them honest, but anonymous sellers on the Internet can pocket their pickings and be gone before the word gets around. The anonymity of transitory sellers, and consequent lack of consumer information, presents another obstacle to the growth of e-commerce. And, once again, the ultimate outcome will depend on private sector initiatives.

3. Everywhere and Nowhere.

E-commerce has a tremendous potential to reduce national barriers and usher in a truly global marketplace. Buyers and sellers can communicate instantly halfway around the world, and the potential for expanded trade promises immense improvements in consumer welfare. And yet, consumers who are already wary for the reasons discussed are likely to be even more cautious about transactions across national boundaries. Consumers may wonder what they can do if something goes wrong, not only in terms of the legal standards that apply but also the remedies that may be available when sellers are thousands of miles away. As a practical matter, transactions everywhere are like transactions nowhere.

People who travel abroad have confronted these uncertainties for a long time. If they want to buy items that are too bulky to carry home, they may patronize the "tourist traps" recommended by their travel guides, even though better buys may be available elsewhere. At least, if something goes wrong, the buyers have someone accessible to complain to. The uncertainties in dealing with unknown vendors abroad are, of course, magnified in the e-commerce medium when the buyer has no opportunity to inspect the wares or meet sellers face-to-face.

Problems of this kind cannot be addressed effectively by an array of laws and regulations in multiple jurisdictions around the world. In fact, burdensome and inconsistent regulation may do more to inhibit global e-commerce than to expand it. Solutions ultimately will have to be found in the private sector. And the practical response of experienced and wary travelers who are dealing with low-tech commerce does suggest a solution for the high-tech world. In short, there will be a consumer demand for accessible third parties with established reputations to provide assurances for the performance of those entities that are unknown and remote.

III. Meeting the Challenge

Consumers' concerns about protection of their privacy, reliability of sellers, and remedies to address grievances are likely to generate support for various regimes of "private law." Voluntary associations of sellers can offer assurance that their members will abide by certain ethical standards, and they can provide a convenient forum to address claims that members have failed to do so. Sellers who agree to abide by the rules of the association may display a "seal" of approval or otherwise advertise their adherence to the association's principles. The costs that the voluntary association incurs, in the process of policing its principles, can be covered by charges and fees imposed on seller members who benefit from the association's goodwill. This goodwill may enable the seller member to sell more goods and services or command a premium price.

Different associations may offer different levels of protection. For example, an association that includes sellers of complex products may offer assurance that performance claims have been independently verified, and establish a process for doing so. Another association may choose not to adopt such an expensive procedure. Some associations may offer an elaborate (and expensive) arbitration alternative; others may not. Consumers can choose the levels of protection they are willing to pay for. The alternatives available in the marketplace, here the marketplace for regimes of private regulation, will provide a more accurate reflection of consumer sovereignty than public regulation can - - provided always that accurate information is available for consumers to compare alternatives.

The question of whether special public oversight is needed to ensure that consumers have accurate information about the available private alternatives is a controversial one, and involves cost-benefit tradeoffs that lie outside the parameters of this talk. I, for one, however, tend to be wary of claims that e-commerce is so complicated that consumers are inherently unable to make intelligent choices.

Regimes of private law also raise serious policy issues beyond adequacy and accuracy of information. One issue, of particular concern to the Federal Trade Commission, is the potential for anti-competitive effects. The positive or negative effects of private lawmaking are matters that lie at the intersection of the Commission's two major responsibilities, competition and consumer protection. Private restrictions that are designed to ensure that consumers get complete and accurate information can, if carried too far, restrict dissemination of useful information and chill competition.

Historically, the tension between competition and consumer protection has been most evident in the context of professional codes of conduct, which regulate "unethical" marketing practices.(5) These codes have been defended on the ground that professional services are so complex that consumers cannot evaluate necessarily simplistic advertising claims, and they have been attacked on the ground that the advertising restrictions are designed to chill unwanted competition. Both sides can cite analogies from Commission opinions and rules. It is likely that the growth of e-commerce will lead to a proliferation of similar codes because e-commerce consumers face many of the same problems that consumers of professional services do, namely, information gaps that make it hard for them to evaluate the accuracy of information they receive.

The tension between competition and consumer protection concerns can be resolved with good will and good counseling. A number of private organizations deal successfully with these issues today. Their lawyers are fully conversant with the issues and the antitrust agencies have streamlined procedures to provide guidance in areas of doubt.(6) The key elements of a successful private regulatory program in the area of e-commerce, as anywhere, may be summarized as objectivity, transparency and due process. Standards of conduct must be objectively determined to aid consumer protection goals, rather than to aid the competitive fortunes of the decisionmakers. The standards must be communicated clearly and enforced consistently. And, it is prudent to have a fair and open process for resolution of disputes.

Obviously, scrupulous adherence to these requirements becomes increasingly important to the extent that the private regulatory organization has some "market power" - - that is, to the extent that membership confers some competitive advantage. But, this kind of market power is not necessarily sinister; the competitive advantage here, as in many other areas, may simply reflect consumer confidence in the integrity of an organization's members based on their adherence to its ethical codes. In traditional antitrust terminology, the organization's power is derived from a "superior product" or "business acumen,"(7) and it can have the ultimate effect of expanding e-commerce, rather than contracting it.

Conclusion

There is extensive evidence of consumer wariness about the e-commerce medium. Privacy is the most pressing and visible concern, but there are other problems as well. Government alone cannot address the problem; extensive private initiatives are required. I am confident that these private solutions will emerge and that, with public encouragement, they will be effective.

Endnotes

1. This is the written version of a talk that has been given, with individual variations, to a number of marketing groups over the last several weeks. I am indebted to all of my attorney advisors - - Thomas Klotz, Lisa Kopchik, Jonathan Smollen and Holly Vedova - - for their ideas and their help as this talk has evolved. The opinions expressed, however, are my own and I do not speak for others in the Commission.

2. One estimate of online U.S. retail transactions in 1999 was $20.2 billion. See Forrester, Online Retail, available athttp://www.forrester.com/ER/Press/Release/0,1769,164,FF.html (September 1999). By contrast, U.S. business-to-business transactions in 1999 were estimated at $115 billion and are projected to increase to $1.5 trillion by 2004. Goldman Sachs, B2B: 2B or not 2B, available at http://www.gs.com/hightech/research/b2b.

3. In response to reports that some online retailers have failed to fulfill their delivery promises, the Commission recently initiated investigations of about a dozen online retailers. Caroline Meyer, Online Retailers Face FTC Probe; Holiday Shopping Delays to be Checked, Wash. Post, Feb. 12, 2000, at E01.

4. Some sellers may also be concerned about the relative anonymity of buyers.

5. See California Dental Ass'n v. FTC, 119 S. Ct. 1604 (1999).

6. A recent example involved an inquiry from the Direct Marketing Association ("DMA") as to whether the antitrust laws would permit a requirement that its members: (1) use the DMA's Mail Preference and Telephone Preference Services to honor consumers' requests that they not be contacted by direct marketers; (2) disclose to consumers how members sell or otherwise transfer personal information about those consumers to others; and (3) honor consumers' requests that members not sell or transfer their personal information. In an advisory opinion, FTC Bureau of Competition staff advised that these requirements would not harm competition or violate the FTC Act. Letter from Bureau of Competition Assistant Director to Counsel for the DMA, Sept. 9, 1997, available at /os/1997/9710/dma.htm.

7. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).