Believe me - legal services, credence goods and the CMA

With the news that the Competition and Markets Authority (CMA) is launching a study into, "into legal services in England and Wales to see if they are working well for consumers and small businesses," your Katonomist thought it might be time to look at the legal profession itself.  In particular, the unusual nature of legal services as a 'credence good.'

Credence goods

The short explanation of a credence good: your clients are dumb.

The vitamins are working!
Bodybuilder Kitten, Modern Primate

The long, slightly more sympathetic version of a credence good: your clients do not have sufficient information by which to evaluate your services.  A credence good is a good or service whose quality cannot be ascertained by the consumer.  The consumer must simply believe it works. Examples of credence goods are: vitamins, life coaches, education and anti-aging creams.

In the market for a credence good, there is a huge information asymmetry, meaning not everyone has the same information.  For legal services, it means providers have significantly more information about the quality of their services than clients.  Even after a court case, the client has insufficient information to know if the outcome was inevitable, or if they hired the right experts.

Markets for credence goods are open to abuse and may pique the interests of government competition regulators.  The large information asymmetry between producers and consumers allows for distortions in pricing and quality; the consequences for overcharging are few. Theoretically, all consumers should be sceptical of the quality they are receiving, and should assume it is poor quality. Prices should be lower. However, the legal profession is regulated to ensure a minimum standard, and consumers may associate price with quality. Prices are higher. Reputation becomes very important -- hence the need to signal to potential and existing clients of the firm's prowess via things like expensive office space.

Interestingly, the Wikipedia entry for credence goods suggests only transactional legal services count as credence goods.  I would argue the opposite, as transactions should be more standardised and routine than other types of legal services.  <Merpel wonders if this is simply a difference in the economic and legal definitions of transactions.> This 2013 paper by Camille Chaserant and Sophie Harnay agrees with my interpretation and is therefore an example of excellent scholarship. Relevant to the CMA Review, Chaserant and Harnay suggest a nuanced approach to the regulation of legal services. They argue, "not all the markets for legal services should be regulated or, conversely, deregulated," and that the decision between self-regulation and government regulation is also dependent on the particular type of legal service.

CMA Review

The CMA is the UK government body responsible for reducing, and sometimes regulating, anti-competitive behaviours. Their announced study raises questions about the legal services market, and the wording in the announcement reflects concerns about the credence good nature of legal services. "Not being equipped with the necessary knowledge stops customers exercising choice and prevents competition working effectively. We want to see if some customers end up paying more than they expected or receive a poor service. We also think there may be questions over the redress available if this does happen."

This cream is working!
"2 week-old Female Sphynx (Suki)"
Schuminweb, Wikipedia

Small businesses do not seem to have a particularly favourable view of the market. As the CMA notes: "According to recent surveys around one in ten users of legal services in England and Wales have said that the overall service and advice provided to them was poor value for money whilst, amongst small businesses, only 13% said they viewed lawyers as cost-effective and around half agreed that they used legal service providers as a last resort to solve business problems."

Consumers and small businesses are likely to be less frequent, and therefore less sophisticated, consumers of legal services; distortions stemming from the credence good nature will be most acute in this market. Larger businesses may be better-informed consumers, but still have less information than the experts they hire.  The findings of the study may apply to big business, and IP legal services may not be immune to any competition concerns it raises.

The CMA review also suggests that, "concerns have also been raised about the complexity of the current regulatory framework."  That opens up the possibility for de-regulation or changes-meant-to-reduce-complexity-but-actually-increase-it. Yet, if Chaserant and Harnay are right, the diversity of legal services may make it difficult to streamline regulations.

Readers, take note -- the CMA's study suggests concern about the quality ("standards") and costs ("affordability") of the market. The study itself can spur subsequent surveys, nothing at all, or even, "competition or consumer law enforcement action." The CMA is inviting views on the study. These should be made in writing by no later than 5pm on 3 February 2016. Please email: legal.services@cma.gsi.gov.uk 

For more thoughts on how you have to trust your lawyers, see the Business of Law Blog's video.