A Hierarchy of Markets: How Basic Needs Induce a Market Failure

Abstract

This essay introduces an innovative framework for consumer protection, based on consumers’ basic needs. Current contract law is based on a binary model: contracts which lack consent are considered void and are not enforceable under the unconscionability doctrine. Yet, voluntariness is not binary. Rather, voluntariness is a hierarchical continuum reflecting human needs. Certain products are purchased because the consumer has to have them, while other products are purchased as a discretionary consumer choice. Current law does not make the distinction between essential and non-essential markets. Consumers of luxuries and consumers of essentials are considered equal, and receive similar legal protection under the contractual framework of the consumer transaction. This essay offers a theory of essential markets and their regulation. The essay surveys the behavioral literature discussing human needs and the distinction between essentials and luxuries, and applies the needs-based theory to consumption, creating a pyramid of markets following Maslow’s hierarchy of needs. The essay identifies the determinants of market essentiality, including a moral baseline of consumption; lack of good substitutes and inability to decline purchase; and time constraints creating difficulty to defer purchase. The continuum of market essentiality is then demonstrated using four examples, including electricity for heating, infant formula, broadband services, and a violin. The essay argues that essential needs-based consumption induces a behavioral market failure, where consumers' decision-making process is particularly vulnerable and distorts sellers' incentives towards a sub-optimal equilibrium. Markets of essentials tend toward failure of demand, due to consumers’ bounded voluntariness and lower probability of informed choice. Accordingly, sellers in markets of essentials have higher incentives for collusion and lower incentives for price competition and for investment in product quality. Thus, the likelihood of market failure increases with the essentiality of the product: the more basic the underlying need, the higher the probability for market failure. The difficulty of regulators to tell which markets are essential is addressed. The essay suggests two methods for assessment of essentiality - the first, through political assessment, and the second, through analysis of market data documenting elasticity of demand for popular product categories. Low elasticity of demand for popular product categories is proposed as a market signal for consumers’ bounded voluntariness and for product essentiality. The normative implications of this structural division of markets are discussed and initial policy guidelines suggested. Essentiality and its tendency to create a behavioral market failure implies that consumer law should be structured with a hierarchy of rights, similar to constitutional or international human rights laws. Essential products should be subject to a higher degree of paternalism compared with non-essentials.