FTC Staff Comment Before the South Carolina Legislative Audit Council Concerning Possible Restrictive or Anticompetitive Practices in the Statutes of Certain Agencies

FEDERAL TRADE COMMISSION
WASHINGTON. D. C. 20580
BUR£AU O~ £CONOMICS
January 15,1987
George L. Schroeder, Director
Legislative Audit Council
State of South Carolina
620 NCNB Tower
CollJmbia, South Carolina 	29201
Dear Mr. Schroeder,
The 	staff of 	the 	Federal Trade Commission l 	is 	pleased 	to 	respond 	to
the 	invitation 	of 	the 	Legislative 	Audit 	Council 2 	of 	the 	State 	of 	South
Carolina for comments on possible restrictive or anticornpctitive practices In
the state statutes and regulations of the following agencies:
Licensing Board for Contractors
Residential Home Builcers Commission
Real Estate Commission
Board of Certification of Environmental System Operators
Board of Registration for Professional Engineers and Land
Surveyors
M:lnufact~red Housing Board. 3
1 These comments 	represent 	the 	views of 	the 	Bureaus of Competition,
Consumer 	Protection, and 	Economics of the Federal Trade Commission, and
do 	not 	necessarily 	represent 	thc'/icws 	of 	the 	Commission 	or 	of 	any
individual Commissioner. 	The Commission h:ls, however, voted 	to authorize
the suumission of these comments, with Commissioner Bailey dissenting.
2 FTC 	staff 	provided 	comments 	to 	the 	Legislative 	Audit 	Council 	of
South Carolina on three earlier occasions. 	On February 	19, 1987, FTC staff
commented on 	the sunset audit of the Boards of Optometry and Optieianry.
On April 	23, 1987, FTC staff commented on the sunset audit of the Boards
of 	Podiatry 	Examiners, 	Occupational 	Therapy 	EX3miners, 	Speech 	and
AudioloSY 	Examiners, 	and 	Psychology 	Exami"lCTs. 	On 	Septembcr 	29, 	1987,
FTC staff commented 	on 	the statutes concerning 	the South Carolina Public
Service Commission.
3 Letter 	from 	George 	L. Schroeder, 	Director 	of 	the 	Legislative 	Audit
-Council of the State of South Carolina, June la, 1987.

Our analysis and our experience In related matters lead us to conclude
that 	a 	number 	of 	provisions in 	the 	statutes and 	regulations 	governing 	real
estate professionals, land surveyors and engineers could have anticompetitive
effects.' 	You 	may wish to weigh the possible costs of these anticompetitive
effects against any quality enhancing benefits.
Section 	I 	of 	this 	comment 	reviews 	the 	interest and 	experience of 	the
Federal 	Trade 	Commission 	staff 	in 	the 	area 	of 	occupational 	regulation.
Section 	II discusses the 	cconomic rationale 	for such 	regu!:ltion. 	Section 	III
examines 	particular sections 	in 	the 	statutes 	and 	regulations 	that 	appear 	to
incrcase 	quality, 	but 	also 	have 	the 	potential 	for 	producing 	anticompetitive
effects. 	Section IV sets out our conclusions.
1. 	The Feder~' Tr~de Commission's Tnterest and Experience In Occup~tion~:;
Regula tion
Under 	the Federal Trade Commission Act, 15 U.S.c. 	§ 41 	et seq., the
Commission 	is 	charged 	with 	preventing unfair 	methods of compctition 	and
unfair or deceptive acts or practices. 	In addition 	to our enforcement work
directed 	toward 	these goals, we encourage legislatures and 	regulatory bodies
to consider competition policy and consumer welfare as important elements in
their deliberations on various regulatory issues.
'The 	staff 	has 	reviewed 	the 	statutes 	and 	regulations 	of 	the 	six
building-related 	trades 	for 	possible anticompetitive or 	restrictive 	provIsions.
Taking 	into 	consideration 	the 	number 	of statutes and 	regulations 	involved,
however, it is 	possible 	that some potentially anticompetitive provisions have
escaped 	our 	attention. 	If 	the 	Legislative 	Audit Council 	has 	any 	questions
regarding 	statutes 	or 	regulations 	not 	discussed 	in 	our 	letter, 	we 	encourage
you to contact us for further review of these practices.
2

For !:veral yeJrs, the Commission has maintained a program relating to
the competitive effects of various restricti0ns on state-licensed professionals,
including optometrists, dentists, and 	lawyers.s 	In 	addition, 	the 	Commission
staff 	has 	extensively 	studied 	the 	nature 	of competition 	in 	the 	real 	est:lte
industry.6 	In 	one 	study 	of 	the 	residential 	real 	estate 	industry, 	the
Commission's Los Angeles Regional Office concluded 	that certain 	provisions
in state regulations of the industry often tend to dampen competition. 1 	Our
goal 	throughout 	has 	been 	to 	help 	policy 	makers 	identify 	regulatory
restrictions 	that 	decrease 	competition 	and 	increase 	costs 	without 	providing
offsetting benefits.
S Staff 	economists 	have 	examined 	such 	restrictions. 	Liang 	and 	Oe':r,
Restrictions 	on 	Dental 	Auxiliaries, 	Washington, 	D.C.: 	Federal 	Trad!;
Commission, 	1987; ImrrovinQ Consumer Access to Legal Services: 	The Case
for 	Removing 	Restrictions 	on 	Truthful 	Advertising, 	Washington, 	D.C.:
Federal Trade Commission, 1984; Bond, Kwoka, Phelan, and Whitten, 	Effects
of Restrictions on 	AdvertisinQ and 	Commercial Practice in 	the PrQfessions:
The Case of Optometry. Washington, D.C.: Federal Trade Commission, 1980.
6 F1ore:lce 	Multiple 	L;sting 	S~rvice Inc. 	of 	Florence, 	S.c., 	861·0081
(December 30, 	1987) (tentatively approved 	consent order) 	(Settling ch3rges
th3t 	it 	has 	restr3ined 	competition 	by 	restricting 	membership); 	Multiple
Listing Service Mid 	County Inc. of Brooklyn, N.Y., 851·0108 (December 30,
1987) 	(tentatively 	approved 	consent 	order) 	(Ending 	practices 	th3t 	have
allegedly 	restr3ined 	price 	and 	service 	competition 	among 	residenri31 	real
estate brokers); Multiple Listing Service of Gre3ter Michig3n City Arc:!. Inc.,
106 F.T.C. 95 (1985); OranQc 	Countv 	Board 	of 	Realtors. 	Inc., 	106 F.T.C. 88
(1985); Brief for 	the Federal Tr3de Commission as 	Amicus Curiae, Coldwell
B3nker Residential 	Re:1I 	Estate Services of 	Illinois, 	Inc. 	v. 	Clayton, 	105 111.
2d 	289, 	475 	N.E. 	2d 	536 	(1985); 	The 	Residential 	Re:l! 	Estate 	Brokerage
Ind ustry, 	Washington, 	D.C.: 	Los 	Angeles 	Regional 	Office 	(LARO) 	of 	the
Federal Trade Commission, 1983; 	Butters, Consumers' Experiences with Re?!
Estate 	Brokers: 	A 	Report 	on 	the 	Consumer 	Survev 	of 	the 	Fede~11 Trade
Commission's 	Residenti:lI 	Real 	Estate 	Brokerage 	In y estiQ3rion, 	Washington,
D.C.: 	Federal Trade Commission, 1983.
1 Th e 	Res id en t ia I 	Rea 1 Esta Ie 	Bro kera ge 	Tnd ustrv, 	Wash in g ton, 	D.C.:
Los Angeks Regtional Office (LARO) of the Federal Trade Commission, 1983.
p.188-190,
3

II. 	The Economic Rationale for Occupational Regulation
It is sometimes difficult 	for 	consumers 	to determine 	the 	quality 	of a
service 	they 	desire 	to 	purchase. 	In 	some 	cases, 	the 	qual i ty 	of 	a 	service
cannot be evaluated even after a purchase. 	For example, the plaintiff in an
unsuccessful medical m:lIpractice case may be unable to determine, if his case
failed due to its lack of merit or due to his lawyer's incompetence. 	Because
consumers may base their willingness to pay for a particubr service on the
"a v erage"8 	qu:l1ity 	they 	expect 	to 	receive, 	there 	could 	be 	an 	incentive 	for
anyone 	professional 	to 	allow 	the quality 	of his service 	to 	deteriorate. 	If
professionals 	cannot 	capture 	the 	gains 	associated 	with 	difficult-to-detect,
higher quality service, the mark::t may be flooded 	with low quality service.
This 	is 	one 	eX3mpie 	of 	market 	failure 	in 	the 	occupational 	are3, 	and 	;.
frequently cited as the main justification for occupational regulation designed
to increase the quality of service. 9
Another 	type 	of 	market 	failure 	might 	occur 	when 	professionals 	or
consumers 	do 	not 	take 	into 	account 	the 	effect 	of 	their 	sales 	or 	purchase
decisions on parties not directly involved in a transaction. 	For example, an
individual consumer 	may prefer a 	mobile 	home with a 	minimum of safety
features. 	Frequently, however, mobile home sites are densely clustered, and
the 	mobile 	home 	with 	minimum 	safety 	features 	may 	therefore 	pose 	a
8 If, for example, a consumer is unable to evaluate the quality of any
particular dentist's services, he 	may 	b:lse 	his decision on 	what 	he perceives
to be the average qU:llity of dentists' services.
9 Young, 	The 	Rule 	of 	Experts: 	Occupation:l1 	Licc~sing in 	America,
Washington, 	D.C.: 	Cato 	Institute, 	(1987) 	p. 	15; 	Rottenberg, 	Occupational
Licensing and 	Regu13tion, Washington, D.C.: 	American Enterprise Institute,
1980, p. 7~ Consumer Information Remedies Policv Session, Washington, D.C.:
Federal Trade Commission, 1979, p. 36.
4

signific3.nt health and safety risk to other mobile homes In the area. 	To the
extent that the consumer does not take into account the effect of his safety
choice on the safety of others, he may choose less than 	the socialry optimal
amount of safety equipment for his mobile home. lO 	In this type of situation,
policy 	makers 	may 	wish 	to 	take 	action 	to 	insure 	that a 	proper amount of
safety equipment or quality is present.
The 	rationale 	for 	occupational 	regulation 	has 	typically 	been 	to
guarantee a minimum quality standard in order to (a) reduce the uncertainty
about quality that consumers face when purChasing professional services; and
(b) prevent costs to society which might occur in a market without minimum
" 	quality assurance. 	Although a few studies have indicated that higher quality
levels 	result 	from 	licensing,ll 	a 	majority 	of 	the 	work 	to 	date 	has 	found
quality 	to 	be 	un:lffected 	by 	licensing 	or 	other 	restrictions 	associated 	with
licensing. 12
10 The 	socially 	optim:tl 	amount 	of safety 	equipment 	occurs 	when 	the
expected 	cost 	of 	additional 	equipment 	is 	equal 	to 	the 	expected 	benefit--
where 	cost 	and 	benefit 	measures 	reflect 	not 	only 	the 	effect 	of 	an
individual's 	safety 	choice 	on 	his 	own 	welfare, 	but 	also 	on 	the 	welfare 	of
persons affected by the decision.
11 	Begun and Feldman, "The Welfare Cost of Quality Changes Due to
Professional 	Regulation," 	Journ:ll of Tnc1ustri:ll 	Economics 	34 (1985), p. 	17;
Holen, 	"The 	Economics 	of 	Dental 	Licensing," 	Washington, 	D.C.: 	Public
Research 	Institute, 	Center 	for 	Naval 	Analysis, 	1978. 	A 	few 	studies 	have
found licensing to be associated with lower quality: 	Kwoka, "Advertising and
the Price and Quality of Optometric Services," 	American 	Economic Review
74 	(1984), 	p. 	21 J; 	Carrol 	and 	Gaston, 	"Occupational 	Restrictions 	and 	the
Quality of Service Received: 	Some Evidence," 	Southern Economic Journal 47
(1981), p. 959.
12 Martin, "An Examination of the Economic Side Effects of the 	State
Lice:1Sing 	of 	Pharmacists." 	Doctoral 	Dissertation, 	University 	of Tennessee,
1982; Paul, "Competition 	in 	the Medical 	Profe~sion: 	An 	Application of the
Economic Theory 	of 	Regulation," Southern 	Economic 	Journ:1\ 	48 	(1982), p.
559; 	Bond, 	Kwoka, 	Phelan, 	and 	Whitten, 	Effects 	of 	Restrictions 	on
Advertising 	and 	Commercial 	pqctice 	in 	the 	Professions: 	The 	Case 	of
Optometrv, 	Washington, 	D.C.: 	Federal Trade Commission, 	1980; Muris 	and
5

In 	contrast, 	the 	costs 	associated 	with 	licensing 	have 	been 	well
documented. 	!':umerous 	studies 	have 	shown 	that 	licensing 	and 	associated
restrictions often result in higher prices. 13
Thus, 	in 	considering 	any 	licensing 	proposal, 	it 	is 	important 	to 	weigh
carefully the likely costs against the prospective benefits. 	Restrictions that
tend 	to 	increase 	quality 	should 	be 	examined 	to 	determine 	whether 	the
expected benefits of increased quality outweigh any anticompetitive costs.
The benefits of licensing may outweigh the costs when consumers make
a 	·once 	In 	a 	lifetime 	purchase; 	or 	when 	they 	are 	otherwise 	unable
accurately 	to 	assess 	the 	quality 	of 	a 	professional's 	service. 	Licensing 	is
especially 	likely 	to 	be 	beneficial 	when 	there 	are, 	in 	addition, 	significant
health 	or 	safety 	risks. 	For 	example, 	persons 	needing 	brain 	surgery 	and
emergency health care arc likely to benefit from licensing 	requirements. 	In
these situations, consumers are unable to evaluate the quality of service, and
the expected costs associated with low quality service are high.
McChesney, 	"Advertising, 	Consumer 	Welfare, 	and 	the 	Qu:l!ity 	of 	Leg::l!
Services: 	The 	Case 	of 	Legal 	Clini:::s; 	Law 	and 	Economics 	Center,
University 	of 	r-.tiami, 	\Vorking 	Paper 	is-5, 	1978; 	Healey, 	"The 	Effect 	of
Licensure 	on 	Clinical 	Laboratory 	Effectiveness," 	Doctoral 	Dissertation,
University of California, Los Angeles, 1973. 	The fact 	that authors disagree
on quality effects may partly stem from the necessity to choose a particular
variable 	used 	as 	a 	proxy 	for 	quality. 	Where:ls 	'price" 	is 	unidimensional,
"quality" is multidimensional; i.e .. many aspects of quality could be chosen to
proxy 	the "quality" of 	a 	particular 	profession11 service. 	Thus, any quality
proxy in these studies may not capture all of the relevant dimensions of quality.
13 Liang and Ogur, Restrictions on Dental Auxiliaries, Washington, D.C.:
Federal Trade Commission, 1987; Conrad, and Sheldon, "The Effects of Legal
Constraints 	on 	Dental 	Care 	Prices: 	Inquirv 	19 	(1982), 	p. 	51; 	She;:>ard,
"Licensing 	Restrictions 	and 	the 	Cost of 	Dental 	Care: 	Journal 	of 	Law 	and
Economics 21 	(1978), p. 	187. 	Licensing restrictions have also been found to
increase the incomes of those within the regulated profession.
6

In contrast, regulation is less likely to be beneficial 	if reputations for
quality 	can 	be 	accurately 	established 	within a community at 	relatively low
cost. 	Consumers 	may 	karn 	of 	a 	professional's 	reputation 	from 	friends,
family, 	other 	professionals, 	advertisements, or 	trade 	names. 	To 	the 	c:-:,ent
that reputation 	is an effective signal of quality, cor.sumers will be less apt
to 	make 	inaccurate quality 	assessments 	and 	incur 	costs 	associated 	with 	an
inaccurate assessment.
We 	now 	turn 	tG 	a 	discussion 	of 	the 	specific 	provisions 	that 	the
Legislative Audit Council may wish to reconsider.
III. 	Analvsis of St:1tutes and Regulations
A. 	Advertising bv Real Estate Schools
Section 	105-200 	of 	the 	regulations 	of 	the 	Real 	Estate 	Commission
concerns 	the 	ad vertising 	of 	real 	esta te 	schools 	and 	provides 	tha t 	"[s]chool
advertisements 	shall 	not 	appear 	under 	the 	real 	estate sales or 	help 	wanted
columns 	of 	newspapers 	or 	directories." 	Limiting 	where 	advertisements can
appear 	may 	lncrease 	the 	cost 	of 	advertising 	to 	potential 	real 	estate
professionals. 	For example, 	schools 	may 	be able 	to 	inform 	more 	potential
students 	with 	one advertisement 	in 	the 	real 	estate 	sales 	section 	than 	with
two or more advertisement3 in another section of the paper.
The 	FTC 	has 	documented 	the 	adverse 	effects 	on 	consumers 	and
competition 	of 	restrictions on 	advertising 	in 	the 	legal 	profession. 	A 	study
by the Commission's staff concluded that fees for a number of routine legal
services 	were 	higher 	In 	cities 	tha t 	imposed 	time, 	place 	and 	manner
7

restrictions 	on 	advertising.!' 	Al:hough 	we 	recognize 	that 	South 	Carolina
may 	have 	concerns 	which 	justify 	this 	regulation, 	you 	might 	want 	to
ree laluate 	the 	acvertising 	restriction 	in 	light 	of 	the 	possible 	cost it 	could
impose on consumers.
B. 	Nonresident Re:lI Estate Professionals
Section 	105- 11 	of the regulations of the Real 	Est3 te Commission st3 tes
th3t 	the 	~Commission 1S 	authorized 	to 	license 	nonresident 	brokers 	and
salesmen 	by 	reciprocity 	where 	the 	other 	state 	offers 	simil:H 	privileges 	to
South Carolina 	re31 	eSTate brokers and 	s3lesmen~ (emphasis added). 	Section
40-57-140 	of 	the 	South 	C:J.rolina 	Code 	of 	Laws 	requires 	nonresidents 	who
~eek 	a 	South 	Carolina 	license, 	in 	3ddition, 	to 	~meet 	the 	statutory
qualifications and standards required of residents." 	Thus, qualified out-of-
state 	residents 	3re 	allowed 	to 	compete 	in 	South 	Carolin3 	only 	if 	South
Carolina residents are also allowed to compete in the other state. 	While this
restriction is favorable to South Carolina rcal estate professionals, bec3use it
insulates 	them 	from 	some 	sources 	of 	competition, 	it 	may 	not 	benefit
consumers 	In 	South 	C:J.rolina. 	The 	restriction 	might 	tend 	to 	benefit
consumers 	10 	neighboring 	st3tes, 	by 	encouraging 	these 	states 	to 	adopt
reciprocity arrangements with South C3rolin3. 	In other professions, however,
14 Improving 	Consumer 	Access 	to 	LegJ.l 	Services: 	The 	Case 	for
Removing 	Restrictions 	on 	Truthful 	Advertising, 	Washington, 	D.C.: 	Feder31
Trade Commission's Cleveland Regional Office and Bureau of Economics, 1984.
8

restrictions 	on 	mobility 	have 	been 	found 	to 	incre:lse 	both 	incumbents'
incomes and the prices of services to consumersY
C. 	Real Est:l re Salesmen /Brokers
Section 	105-17 of 	the regulations of the Real Estate Commission states
that 	a 	broker shall 	not employ a salesman 	whose 	residence 	is 	located 	more
than 	25 	miles 	from 	the 	broker's 	office. 	This 	restriction 	could 	reduce
competition 	among 	real 	estate 	professionals 	and 	increase 	prices 	for 	real
estate professionals' services. 	Although salesmen who live within 25 miles of
the 	office 	may 	have 	a 	grc:lter knowledge of 	the locality and 	thus 	provide
higher 	quality 	services 	within 	that 	area,16 	salesmen 	may 	have 	a 	good
knowledge 	of 	the 	area 	without 	currently 	residing 	in 	it. 	For 	example, 	;\
salesman may have lived in the area most of his life and recently moved_ to
an 	adjoining 	Leighborhood. 	The place of residency 	may not 	necessarily 	be
related to quality of service.
The 	25 	mile 	limit 	rule 	appears 	to 	be 	arbitrary 	and 	1S 	probably
unnecessary, 	because 	the 	m:Hket should 	work 	to insure 	that 	brokers employ
salesmen 	with 	a 	good 	knowledge 	of 	the 	locality. 	Although 	this 	restriction
may have quality enhancing benefits, these benefits may be minor compared
15 Boulier, 	"Influence 	of 	Licensure 	on 	Dentists: 	In 	Occup~rion;l1
Licensu re 	and 	ReQula I ion. 	Ed ited 	by 	Simon 	Rotten berg. 	Washington, 	D.C.:
A.E.I., 1980; Pashigian, "Occupational Licensing and the Interstate Mobility of
Pr0fessionais," Journal of Law and Economics 22 (1979), p. 1.
16 The 	Residential 	Rea! 	Estale 	Brokerage 	Industrv, 	Washington, 	D.C.:
Los Angeles Regional Office (LARO) of the Federal TrJde Commission, 1983,
p. 35 ("The geographic markets within which individual brokers operate are
relatively 	small 	areas, 	and 	intense 	knowledge 	of 	the 	IOClI 	market 	often
represents the individual broker's most valuable expertise.")
9

to 	the 	potential 	costs 	that 	limited 	entry 	could 	impose 	on 	South 	Carolina
consumers.
D. 	Eneineers and Land Survevors Pavine Commissions
Section 	49-17 	of 	the 	regulations 	of 	the 	State 	Board 	of 	Engineering
Examiners sta tes:
The 	Engineer 	or 	Land 	Surveyor 	shall 	not 	offer 	to 	pay, 	either
directly or indirectly, any commission, political contribution, or a
gift, or 	other consideration in order to secure 	work, exclusive of
securing salaried positions through employment agencies.
Although 	this 	regulation 	may 	be 	aimed 	primarily 	at 	deterring 	bribes 	and
corruption, 	as 	currently 	stated, 	it 	may 	also 	deter 	some 	desirable 	behavior.
The 	use 	of 	commissions 	to 	secure 	work 	rr.ay 	actually 	promote 	efficier,t
outcomes to the extent that such payments encourage referrals which would
1i kef y 	bene fi t 	consumers. 	For example, ref errals 	to 	a 	su rve yor or en gineer
with 	particular expertise, even if based in part on 	the fin:lncial 	interest of
the 	referring 	party, 	may 	serve 	the 	customer's interest 	better 	than 	retention
of the matter by the less ideally skilled practitioner. 	To the extent that the
above 	regulation 	discourages 	efficient 	leferrals, 	it 	imposes 	costs 	on
consumers. 	Although 	we 	recognize 	the 	possible 	benefits of 	this 	restriction,
South Carolina 	policy makers might wish to consider, as well, the costs that
this provision may impose on consumers.
10

E. 	Engineers and Land Survevors ReceivinQ Pavments
Section 	49-16 	of 	the 	regulations 	of 	the 	State 	Board 	of 	Engineering
Examiners 	states 	that 	engineers 	and 	land 	surveyors 	"shall 	not 	solicit 	or
accept financial or other valuable consideration from material or equipment
suppliers for specifying their products: 	While this regulation would prevent
clearly 	fraudulent 	"kickb:lcks" 	that 	would 	harm 	consumers, 	it 	might 	also
inhibit potentially beneficial outcomes. 	For example, engineers and surveyors
may have insufficient incentive to provide valuable information to customers
about the most desirable material or equipment supplier. 	To the extent that
professionals 	provide 	less 	information 	to 	customers 	under 	this 	provision, a
cost 	is 	imposed 	on 	consumers. 	South 	Carolina 	policy 	makers 	may 	want 	to
consider 	this 	potential 	cost 	in 	their 	evaluation 	of 	the 	desirability 	of 	this
regu1:l tion.
IV. 	Conclusion
Our analysis and experience lead us to conclude that several provisions
of 	South 	Carolina's 	statutes 	and 	regulations 	governing 	real 	estate
professionals, land surveyors and engineers may have anticompetitive effects.
Although we recognize that South Carolina policy makers may have concerns
which 	justify 	the 	imposition 	of 	the 	regu!:l.tions 	mentioned 	above, 	you 	may
benefit from a reconsidera!ion of these 	restrictions 	in 	light of 	their costs.
We 	appreciate 	this 	opportunity 	to 	present 	our 	views.
I 1
Please 	contact

staff 	economist 	Carolyn 	A. 	Woj 	at 	(202) 	326-3434 	should 	you 	have 	any
questions regarding our comments.
Sincerely,
~T-f~'I1~Da vid T. Scheffma n, Director
Bureau of Economics
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