AB 1673, rebate regulation

Topics: Regulation
03 Dec 2007

From: Ervan Darnell


While this is a small issue, I thought AB 1673 [1][2] is an interesting
case study in how politicians get economics wrong. AB 1673 would
require retailers to discount the sale price of an item by any rebate
amount and assume the rebate handling themselves. The do-gooders claim
rebates are a scam because consumers frequently don't claim them and
thus the advertised price is misleading.

Obviously the effect of this is to ban rebates in any meaningful way.

The claim is bogus on the face of it because there is no deception. It's
clearly stated that it's a rebate and the conditions you have to fulfill
to get it listed. It's your decision. Sometimes there is creeping
fraud in that the conditions are actually somewhat more stringent than
listed up front. But that's not the issue this bill addresses.

It's worth asking what the economic utility of rebates is to see what a
really bad idea AB 1673 is. I see two purposes for rebates from the
seller's point of view:

1) Pricing channel discrimination. The manufacturer doesn't want a gray
market developing of internet sales (so as not to undercut retail), but
does want to occasionally discount a product for certain retailers. The
manufacturer offering the rebate gives them discounting control while
keeping the advertised price reasonably consistent. This seems like an
obviously good thing and I won't belabor it here.

2) Hoping consumers don't claim the rebate. At first blush, this seems
like a bad thing, but it's actually a good thing. Here's why: this is
price discrimination (in the technical economic sense). Poor people pay
less by claiming the rebate and rich people (or people who's time is
valuable) pay more by ignoring the rebate. That allows the manufacturer
to charge two prices, each set somewhat closer to the marginal utility
each consumer gets. That allows them to extract a higher seller surplus
with higher net sales and set a lower average price (certainly for tech
goods with high overhead costs and low marginal costs), and even for
high margin goods it allows for more net sales (if not lower average
price) and more consumer satisfaction. This not only improves net
utility it actually helps the poor guy at the cost of the rich guy.
Think of the irony that the state legislature in the interest of helping
the little guy is actually screwing the little guy, because without
rebates he'll be paying more on average. Think of it like grocery store
coupons. It's exactly the same thing and the same logic. Are grocery
store coupons immoral? The California state legislature thinks so.

And, of course, there is the frictional cost of enforcement. The
corruption of deciding what is a rebate. The rent seeking of who is
exempted (car dealers are already).

The free market works even when it seems not to. Government regulation
hurts even the people it tries to help.

[1]
http://www.mercurynews.com/search/ci_7617247?IADID=Search-www.mercurynews.com-www.mercurynews.com
[2]
http://info.sen.ca.gov/pub/07-08/bill/asm/ab_1651-1700/ab_1673_cfa_20070902_134308_sen_floor.html
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