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Self-Interest and Consumers

Business-bashing is in vogue among policymakers, presidential candidates, and pundits who often charge that corporations put profits before people. They all seem to have forgotten that companies benefit society precisely because they limit their objectives: Companies produce profits by providing products or services of varying prices and quality to consumers and businesses. As Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

A recent case in point shows by how this self-interest works to the benefit of consumers. A trade association for phone card issuers, United States Telecard Association (USTA), called with a problem and asked for Consumer Alert's help -- not in putting a spin on the issue, but to help get the word out to consumers who had bought worthless prepaid telephone cards.

Prepaid phone cards, long used in Europe, are taking off in the United States and are one of the fastest growing segments of the telecommunications industry. Now here's the trade group for phone cards faced with a "bad apple" problem: one company's actions may taint the product in consumers' minds and hamper that growth.

A company, USA Calling Company of Atlanta, Georgia, which isn't a member of the industry trade group, had distributed cards to be sold to consumers at retail outlets, and the cards didn't work. The firm subsequently went out of business. Although some consumers stuck with those cards did complain, the trade group estimated that tens of thousands of people who bought those cards from major discount stores may not be aware of the problem.

Realizing that the bad apple could affect its member companies and the future growth of phone cards, the trade group got in touch with the retail stores that sold the cards, and those retailers offered their customers reimbursement of the purchase price of the bum cards.

USTA didn't stop there: 10 of its members are going to provide all consumers who bought the non-working cards with new prepaid cards with the same face amount. They provided a special 800 number -- for a limited time -- for those customers to use to find out how to get the new phone cards. The group also has an on-going consumer hotline for this and other phone card problems: (800) 333-3513.

This example illustrates how producers' self-interest includes protecting consumers from the bad apples of business. They do this by policing themselves -- ensuring that the industry of which they are part has standards of practice and ethical conduct. Unfortunately, the mechanics by which businesses have an interest in scrutinizing their own practices is often overlooked.

Why are legitimate businesses interested in policing themselves? Usually because they realize that consumers have alternatives. If a particular market or segment of a market is perceived as insecure, if consumers believe companies won't deliver what's promised, they'll switch to competitive products or services.

The example also shows one reason why trade groups exist -- to create quality standards for members and to monitor adherence to those standards. In that way, trade groups increase the comfort level of their members' current and potential customers. Sometimes anti-trust laws work to block this function by narrowly viewing positive actions, such as standards setting, as barriers to new competition.

Will responses like those of USTA eliminate all bad apples from the phone card market? No, but their action, aimed at making consumers whole, helps distinguish their members as good guys and their industry as a responsible one. It is in legitimate businesses' self-interest to show their customers that they stand behind their products. It's also in consumers' interest to get that information.

This point is not widely understood, especially in the media. The bad apples often get over-exposure in the news, with the implication that something needs to be done to protect consumers from "industry-wide" practices. The media often underrate their importance as providers of information to the public -- in some cases, information that could help consumers sift the good from the bad. Instead, when the media view their role as helping to expand the role of the regulatory state by treating every business as a bad apple, they help to raise consumers costs -- costs that result from regulatory overkill.

Bad apples do need to be exposed, but they also can be isolated from the bushel, so that they don't spoil the rest. That's in industry's self-interest ... and consumers' best interest.