Daniel Blaseg

29th of May 2017

Jours fixes (usually) take place on the first monday of the month, starting at 5:00 p.m., in HoF E.01 / Deutsche Bank of the House of Finance (Campus Westend).

[Daniel Blaseg, E-Finance Lab]

Consumer Protection And The Lack Of Regulation Of Innovative Enterprises

The growth of innovative, digitally enabled enterprises brings about new challenges for regulators looking to protect consumers. As strict regulation of young, high-growth enterprises can stifle or even kill innovation, regulators and policymakers have made the case for a hands-off approach. While some ask for strict regulation from the beginning, others argue that regulation for innovative, digital enterprises might not be necessary, because (a) consumers in these innovative markets might not need protection, (b) enterprises will self-regulate if protecting consumers is in their own (long-term) interest and (c) customers will learn to deal with or avoid potentially harmful settings if markets are transparent. In this research, we investigate the merits to these arguments by analyzing 36,000 reward-based crowdfunding campaigns, matching the extensive information available on Kickstarter with data from outside sources (e.g., information on retail price and product quality from Amazon and Steam, official customer complaints filed with the FTC, CFPB, and BBB). We show that absence of regulation pertaining to price commitment (which is applied to platforms like Amazon, but not Kickstarter) hurts customers. Customers backing campaigns that promise a discount over the final retail price pay more, not less than retail customers on Amazon or Steam. Moreover, these customers have a lower likelihood of ever receiving the product, suffer longer delivery delays, and receive products of lower objective quality, compared to customers backing campaigns that do not promise a discount. Analyses of customers' sentiments and complaints underline the severe damage done to these customers. We do not find that self-regulation or customer learning would rectify the situation over the years. Analysis of Kickstarter's policy changes over its 7-year lifetime illustrates the platform's failure to self-regulate effectively. Trend analysis provides no evidence that consumers learn over time and adapt their behavior.