Consumer Information and the Pricing of Legal Services

Abstract

In a classic article on the economics of information, George Stigler discussed the impact advertising could have on the dispersion of seller prices quoted in a marketplace.1 As one source of price information, advertising reduces search costs for consumers wishing to obtain some product or service at its lowest possible price.2 The more comparison shopping consumers do because of lower search costs, the better informed they will be about seller price differences and, hence, the less price dispersion the market will support. Until recently, there has been little opportunity for Stigler's process to operate in the market for legal services. The first Canons of Ethics adopted by the American Bar Association in 1908 contained a prohibition against advertising by attorneys and within a few years that provision was adopted in every state, either by legislation, court rule, or court decision. Almost seventy years later, however, in June 1977, the U.S. Supreme Court held, in Bates v. State Bar of Arizona (433 U.S. 350), that attorneys had a first amendment right to advertise fees for routine legal services. The Court's decision was based in part on benefits to consumers that were assumed to follow from advertising-benefits such as the increased ability to shop for prices and, presumably, to obtain lower ones. In 1978 a study was conducted on legal service pricing and advertising in Phoenix, Arizona. Its results provide some evidence on the informed nature of the consumer of routine legal services and the importance of consumer information in the pricing of such services. The purpose of this paper is to present those results. The paper is divided into three sections. In the first section, several factors influencing attorney pricing behavior are analyzed. Routine legal services are distinguished from other legal services in terms of three production function variables. In the second section, the methodology and empirical results of the 1978 Phoenix Area Survey of Private Practicing