Cyberspace: Consumer Protection Issues

Cyberspace: Consumer Protection Issues

Draft, April 7, 1996

Presented at the American Council on Consumer Interests Meeting

Thursday, March 28, Nashville, TN

A shorter version of this paper will be published in the 1996 issue
of Consumer Interests Annual

Sherman Hanna, Professor

Consumer Sciences Department

The Ohio State University



In a sense, consumer protection has been a problem since
humans first started trading 10,000 years ago. However, the explosive growth
in cyberspace has led to some new problems and challenges for consumer
protection. Cyberspace used to mean limited access to text-based email
and reference material for the few who had Internet access through universities
and government agencies, plus the relatively orderly and monitored information
available through online
such as CompuServe, America Online, and Prodigy. Today, however,
direct access to the Internet, especially the graphics oriented material
on the Worldwide Web, plus access to the Internet through the online services,
makes the online services small players in cyberspace (Eng, 1996; Sandberg
& Ziegler, 1996). With online services, there was the potential of
holding the provider responsible for consumer protection problems, as one
might attempt to hold a television network or magazine responsible for
the deceptions of advertisers. The Internet is basically anarchy, however,
with the number of “publishers” of web pages approaching one million.



Commerce is growing in cyberspace, especially as methods
are developed to make credit card transactions reasonably safe (Rupley,
1996). There is still some controversy about how safe transactions are
(Sandberg, 1996) but the majority opinion seems to be that the major credit
card companies have developed methods that are at least as safe as handing
a waiter your credit card in a restaurant (Holland, 1996).



What is Unique About Cyberspace?

Cyberspace is a medium that attracts people with above-average
education and income. It is also such a new medium that government regulation
has not kept pace with it, although there has been a start (Salt Lake
City Tribune
, 1996). In the United States and some other countries,
the growth of cyberspace comes at a time when there are budgetary and ideological
pressures to reduce government regulation, so it is unlikely that there
will be any substantial amount of policing in the near future. In contrast
to print media, information in cyberspace can change almost continuously,
so proving fraud may be difficult.



Cyberspace is also a borderless phenomena. A Commissioner
of the U.S. Federal Trade Commission pointed out that “(T)echnological
advances in telecommunications and finance allow scam artists in one country
to communicate easily with victims in another country and to transfer their
ill-gotten gains from one country to another.” (Starek, 1995). It will
be very difficult for governments to regulate commerce in cyberspace.



What role should the government play in consumer protection
in cyberspace? Judge Richard Posner stated:

 It might seem that the availability of legal remedies
would be unimportant; that the market remedies against misrepresentation
would be adequate in consumer and all other markets (Posner, 1992, p. 110).

 If consumers are informed, or if repeat sales are
important, market forces may tend to correct problems for consumers. However,
consumer dealings with anonymous cyberspace merchants may not fit Posner’s
prescription for laissez-faire.



Sources of Major Consumer Problems in Cyberspace

Rather than considering all possible consumer protection
issues in cyberspace, it may be useful to consider fundamental sources
of consumer protection problems. Ignorance is an obvious candidate for
a source of consumer protection problems. However, if a consumer is ignorant
but skeptical, damage may be limited. Various human weaknesses, when combined
with ignorance, may lead to many types of consumer protection problems.
This paper will focus on three major types of human weaknesses that are
associated with consumer protection problems in cyberspace: greed, the
desire for a cure to medical problems, and lust.



Greed and Investing

Cyberspace offers may opportunities for investors (Hannon,
1996; Rupley, 1995) although there are still information gaps (Middleton,
1996) and outright
(Weiss, 1995). One problem with investing fraud is that
it might take a long time for an investor to discover that there is a problem.
For investors in the United States, all of the regulations of the
Securities and Exchange Commission
should apply, but there is obviously
a difference between trying to recover funds from your local stock broker
and some cyberspace boiler room operator. The general problem predates
cyberspace by many years, perhaps dating back to when long distance telephone
calls became relatively cheap. Investors may ignore common sense because
of their own greed to beat the market.



Consumer education may provide some help. Even if there
is still some controversy about the Efficient Market Theory (Malkiel, 1995),
stress of that concept may inoculate some investors against either an attractive
looking web page offer or a smooth talking swindler on a cold call.



Medical Cures

There are a large number of medical
web sites
and Usenet groups in Cyberspace, many of which are worthwhile.
However, there are also a large number of dubious web sites. For instance,
one company in the Ukraine offered a magnetic device that is said to cure
sexual dysfunctions and various other ills. The consumer merely needed
to send $99 by Western Union to the address listed. The advantage of cyberspace
over 800 numbers for such orders is that working knowledge of written English
is much wider than fluency in spoken English. Therefore, scam artists can
operate from any country that has Internet connections. There have been
some regulatory and judicial actions against dubious medical advertising
(e.g., against an Internet advertisement claiming an AIDS cure) but the
number of claims is so large that regulatory agencies would have difficulty
acting against more than a tiny fraction of them.



Lust and Cyberporn

Pornography helped build the Web — the multimedia communications
available from one’s home or office computer can allow the curious or obsessed
consumer to view and hear things that a local government might restrict,
or that would otherwise only be offered in dangerous neighborhoods in large
cities. Every type of pornography is available
on the Web, and although there are still free samples and some offerings
by amateur exhibitionists, credit card payments and international “900”
numbers are the popular methods of restricting access. There have been
some problems reported with the international “900” numbers, with bills
of hundreds of dollars possible for a relatively short call.



Pornography in cyberspace is the ultimate form of borderless
commerce. No physical shipment of goods is necessary, as even movies (albeit
crude or short with today’s technology) can be transmitted over the Internet.
The key ingredient is the method of payment, which may offer the only form
of consumer protection other than not patronizing a deceptive vendor again.
The potential for government sponsored consumer protection for consumers
of pornography is probably very limited in any case, as many consumers
would not want any publicity and would prefer to suffer in silence even
if ripped off for hundreds of dollars. The local telephone company and
the credit card company do offer the potential for dealing with deceptive
marketing, as a consumer may contest “900” type calls and also credit card


Government to the Rescue?

Government agencies obviously have a role to play, and are
slowly starting to pay attention to the cyberspace phenomena (Yang, 1996).
Government has only limited resources to police cyberspace. With the number
of web pages approaching ten million, consumer protection is very difficult.
For some consumer problems in the U.S., such as product safety, civil actions,
such as medical malpractice and product liability cases can help reduce
the extent of consumer problems in the long run. Civil actions are not
likely to be effective against the international and/or fly-by-night nature
of cyberspace commerce.



Credit Card Companies to the Rescue?

Given that most cyberspace commerce is conducted through
credit cards, it may be that credit card companies will provide the greatest
assistance to consumers. It is no accident that Mastercard is one of the
sponsors (along with the FTC, the National Consumers League, the National
Association of Attorneys General, and several other credit card companies)
of a Web Page for the National Fraud Information
, which solicits complaints about cyberspace fraud. If the major
credit card companies would act against merchants who cheat consumers,
there would be a powerful force against fraud in cyberspace.



Internet Providers to the Rescue?

Before a few years ago, on-line services such as CompuServe,
Prodigy and America Online played a major role in cyberspace commerce.
If that pattern had continued, it might have been possible for these services
to play the type of consumer protection role that the major television
networks played in the past and to some extent today, and that the major
magazines used to play. In that world, there would be at least some screening
by the provider (or network or magazine.) Now, however, the Worldwide Web
makes that type of screening very difficult. The attempt by the 1996 Telecommunications
Act to hold internet providers responsible for access to pornographic content
by minors may provide a model for an approach to consumer protection problems.
On the other hand, the controversy
and legal challenges
to that Act may mean that this type of solution
is unlikely to be applied to consumer protection.



Search Engines to the Rescue?

The main way that consumers find commercial sites is through
using a search engine or index. For instance, under Yahoo!, one
can either search, or use its index of topics. One can quickly get to providers
of dubious medical cures through the Yahoo! index. If judges found
that search engines had some legal liability for fraudulent commercial
services, or such liability were legislated, some consumer protection might
be provided.




Cyberspace is changing so rapidly that it is difficult to
project the future more than a few months in advance. Clearly, international
agreements are needed, and the application of existing laws against fraud
to Cyberspace must be clarified. However, consumer education and private
industry initiatives may provide the most protection.





Eng, P. M. (1996). War of the Web. Business Week. (March 4,)
pp. 71-72.



Hannon, K. (1996). Bonanza on the Net. U.S. News and World Report.
(Jan. 29,) pp. 86-88.



Holland, K. (1996). More hacker-proof than thou. Business Week.
(Feb. 19,) p. 34.



Malkiel, B. G. (1995). A random walk down Wall Street. New York: W.
W. Norton.



Middleton, T. (1996). Lots of data, many gaps in on-line research. New
York Times
. (Feb. 18,) p. F3.



Posner, Richard A. Economic Analysis of Law, Boston: Little,
Brown and Company, 1992(Fourth edition).

Rupley, S. (1996). Mastercard and Visa join forces for Net commerce.
PC Magazine. (March 26,), p. 34.



Sandberg, J. (1996). Major flaw in Internet security system is discovered
by two Purdue students. Wall Street Journal. (Feb. 21,) p. C17.



Sandberg, J. & Ziegler, B. (1996). Web trap: Internet’s popularity
threatens to swamp the on-line services. Wall Street Journal, (Jan.
18,) p. A1, A9.



Salt Lake City Tribune (1996). S. L. firm faces charge over ad.
(March 16,) p. B-5.



Starek, R. B., III (1995). Consumer protection in the age of borderless
markets and the Information Revolution. Speech at the Conference on Transborder
Consumer Regulation and Enforcement, Canberra, Australia.



Weiss, G. (1995). The hustlers queue up on the net: Penny-stock scam
artists are surging online. Business Week. (Nov. 20,) pp. 146-147.



Yang, C. (1996). How do you police cyberspace? The FTC’s Varney wants
Net folk to help write the rulebook. Business Week. (Feb. 5,) pp.