The end of the rip-off economy

IF YOU KNOW how to use artificial intelligence, it can save you a lot of time and money. Leasing a new car? Be sure to upload a photograph of the contract to ChatGPT first. Need help with a leaky tap? AI often understands the issue—and at a lower cost than a handyman. Parents with a fussy baby can now use chatbots to answer questions in seconds, rather than waiting for a doctor’s appointment. Giving Claude a PDF of a wine list is a great way to find the best-value bottles.

These examples add up to something bigger. As AI goes mainstream, it will remove one of the most enduring distortions in modern capitalism: the information advantages that sellers, service providers and intermediaries enjoy over consumers. When everyone has a genius in their pocket, they will be less vulnerable to mis-selling—benefiting them and improving overall economic efficiency. The “rip-off economy”, in which firms profit from opacity, confusion or inertia, is meeting its match.

Information advantages have existed for as long as markets themselves. In medieval England grocers used fake scales to dupe customers; pub landlords put salt in beer to make patrons thirstier. Such squalid practices are not just annoying. In a paper published in 1970, George Akerlof, a Nobel-prizewinning economist, discussed the market for used cars. It is hard for a buyer to know if such a car works properly or is a “lemon” with hidden problems. Buyers thus assume the worst. As a result, honest brokers, worried about being suspected of exploitative behaviour, stay away. The quality of service declines. Fewer consumers fulfil their needs.

The internet has made it harder to screw over customers. With Carfax and other providers of vehicle data, customers can check the history of a vehicle, overcoming some of the problems identified by Mr Akerlof. Taxi drivers now struggle to take people on circuitous but profitable routes, since apps such as Lyft and Uber tell them exactly where to go. Tripadvisor, a reviews website, sends tourists to restaurants that will provide a decent meal. In the early 2000s there were more than 20 branches of Angus and Aberdeen Steak Houses, a notorious tourist trap, in London. Today there are four, and the ones that remain are better than before.

Such developments led pundits to proclaim the end of rip-off markets. “Information perfection is on the rise,” pronounced Jeff Bezos, the founder of Amazon, in 2007. “A lot of economic theories about asymmetric information, while logically correct, have been rendered empirically obsolete,” argued Tyler Cowen and Alex Tabarrok, both of George Mason University, in 2015. We estimate that 25% or so of American consumer spending goes on goods and services with severe informational asymmetries, from health care to home renovations, down from 30% at the turn of the millennium (see chart 1).

But that means plenty of rip-off industries remain. The building trade is a classic example. Homeowners rarely know the first thing about, say, HVAC or paint, which puts them at the mercy of bad actors. Estate agents lease properties with defects that become apparent only once the tenant has moved in. Lawyers provide bad advice, but clients do not find out until too late. Doctors offer the more expensive treatment option. Bureaucrats make all sorts of decisions—from tax penalties to rejecting a planning application—that are difficult to comprehend if you are not an expert.

Economists have tended to focus on the costs of informational asymmetries on a case-by-case basis. In 2012 Susan Woodward of Sand Hill Econometrics, a consultancy, and Robert Hall of Stanford University found that mortgage borrowers typically missed out on at least $1,000 by not shopping around enough brokers. Others lost thousands by failing to refinance their mortgage promptly when interest rates declined. A paper published in 2019 by the Journal of the American Medical Association found that the country’s health-care system wasted up to $100bn a year on “overtreatment and low-value care”.

Add up such estimates, and in America it is likely that rip-off markets impose an effective consumer tax of hundreds of billions of dollars a year. A government-commissioned study in Britain in 2024 estimated that citizens lost the equivalent of 2.5% of GDP a year as a result of buying goods and services that were of unacceptably poor quality or had other defects. This encompassed everything from needing to rebuy a different version of the same product to the time wasted on complaints. Despite the improvements since Mr Akerlof was writing on lemons, the market for second-hand cars is still a tough one (see chart 2).

Startups may provide a glimpse of the future. CarEdge uses an AI negotiator to haggle with dealerships on vehicle prices and terms; Pruvo monitors your refundable hotel booking, rebooking when the rate drops. And generalist LLMs are already helpful. A survey by Clio, a software firm, finds that over half of consumers have used or would use AI to answer a legal question. “The new stereotype is that Gen Z won’t buy a car without running the contract through ChatGPT first,” notes Financial Dystopia, a popular account on X.

When things go wrong, consumers use chatbots to get compensation. A recent paper by Weixin Liang of Stanford University, and others, found that by late 2024 roughly 18% of financial consumer complaints involved LLM-assisted writing. AI “will help people who didn’t have the privilege of great advice to get…pretty great advice,” argues Bret Taylor, the chairman of OpenAI, creator of ChatGPT.

Evidence on the impact of AI-empowered consumers is limited but suggestive. One paper, by Ryan Shea and his colleagues at Columbia University, reports on an experiment involving used cars and apartment rentals. They find that users who interact with an AI model “improved their negotiation performance significantly”. New research by Minkyu Shin of City University of Hong Kong, and colleagues, analysed over 1m complaints to America’s Consumer Financial Protection Bureau, finding that 49% of AI-assisted complaints received relief compared with 40% of human-written ones.

The extent to which AI truly eliminates rip-off markets depends on two things. First, consumers need to know how to use AI properly. Mindlessly repeating advice from ChatGPT is less effective than using the bot as a learning tool that allows a consumer to negotiate more credibly. In this regard, the results of a trial by Jan Biermann, then of the University of Hamburg, John Horton of the Massachusetts Institute of Technology and Johannes Walter of the ZEW-Leibniz Centre for European Economic Research, are encouraging. It involved people estimating how many dots were on an image, with different sorts of AI assistance on offer. The researchers found that people could “assess algorithmic evidence thoughtfully, adjusting their adherence depending on the quality of algorithmic recommendations”.

Second, providers and retailers are likely to fight back with their own AI tools. Amazon listings are already swamped with AI-generated product descriptions. Use ChatGPT with your plumber today, and you may be able to convince him to cut his price. Use ChatGPT with him in a year, and he may have his own model telling him to charge you even more. Companies are working on “generative engine optimisation”, which could result in chatbots putting out information favourable to their product or service. In time, many markets may require AI arbitrators, where both parties agree to abide by the ruling of an impartial third-party bot. What seems clear is that the days of the know-nothing consumer are well and truly over. ■