We have long recognized the impact of market infiltration in the housing sector and the negative impacts on local inhabitants that market infiltration causes.
Can there be a similar concept in other consumer transactions? Lets assume that a seller of goods knows a few things about his buyers. First, he knows that he has a significant market in persons who will not deem insignificant losses as that important to seek a legal remedy. Thus, the loss of a small number of consumers matters little to the merchant’s bottom line. He knows that any of these consumers that feel wronged will do a cost-benefit analysis and just walk away quietly. He also knows he has a second customer base - one that does not necessarily have sufficient means or sophistication to comprehend all of the legal nuances of his or her transaction.
In such a scenario, two classes of consumers merge with different motivations and rationales for pursuing remedies. One group may not be motivated at all to pursue a remedy, even though they have the means to do so. The other group may be highly motivated to pursue a remedy, though they lack the resources or the know-how to do so.
In a new paper Payment Systems, Consumer Tragedy, and Ineffective Remedies, I argue that this metaphor describes potential issues of consumer protection. Let’s consider a couple of consumer transactions. In stored value card transactions, consumers often find themselves at the mercy of merchants who have more thoroughly considered the terms and conditions under which they hold consumer money -- such as whether those terms are the requirement that minimum purchase amounts are required to use cards holding below certain balances. Similarly, consumer prepaid warranties are replete with instances in which consumers are prevented from raising defects that emerge by terms they did not themselves read or understand applied to their purchase. Those consumers that choose to purchase the warranty that represent a wealthier class of consumers may simply forego their remedy because of the perception that the pursuit of a remedy is inefficient. Less-wealthier purchasers who thought they were buying a type of insurance against defect may forego a remedy, not because the costs are inefficient, but because the costs of pursuing the remedy are too steep.
What gentrification as an analogy may do is suggest that our normal filtering of transactional equity needs recalibrating, forcing us to reconsider how the regulatory frameworks that govern such transactions take into account the unequal status of different parties.
The abstract to the paper:
Payment methods like the Starbucks Rewards Card, while imitating liquidity, are challenged by confidence-detracting barriers of too little consumer knowledge and a lack of appropriate remedies. Starbucks operates as a non-banking firm performing an essential banking function – the storage of money for consumers to later use. Consumers are rarely well informed of the nature of this transaction and the relief that may be available when contracting for a future sale. Recent congressional action (CAFA) limiting class action lawsuits to Federal Court significantly limits traditional consumer relief while the bankruptcy code provides little relief should the merchant find itself insolvent. All the while, consumers continue to entrust more than $1 billion each year for merchants to hold with no guarantee that the credits will be honored, few enforcement mechanisms to force merchants to do so, and little relief if the company files bankruptcy. Using the metaphor of consumption gentrification, this Article re-conceptualizes the stored value cards problem as a confluence between fair dealing and risk allocation. In doing so, the Article suggests several avenues of relief, but proposes comprehensive reform that incorporates commercial policy, regulatory oversight, and social consumer awareness.