Online Symposium on Oren Bar-Gill’s Seduction By Contract: Professor Bar-Gill Responds

This is the eighth and final post in a series of posts on Oren Bar-Gill’s recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  Below, Professor Bar-Gill (pictued) responds to the comments provided by Angela Littwin, Alan White and Nancy Kim.

I wish to open these comments by thanking Jeremy fororganizing a great panel and for following up with this on-line symposium. Ialso wish to thank Angela, Alan and Nancy for their thoughtful comments andsuggestions. I cannot, in this space, respond to all the valuable ideas andcritiques that these experts presented in their posts. Rather, I will touchupon three sets of issues that I consider especially important or provocative.

1. The Role of Competition

Competition is often considered to be a solution to marketfailure. “Seduction by Contract” argues that competition is not necessarily asolution to the behavioral marketfailure, which is the focus of the book. In essence, if imperfectly rationalconsumers generate biased demand, sellers in a competitive market must respondto this biased demand by designing products, contracts and prices that exploitthe consumer bias.

This does not mean, however, that competition cannot play ahelpful role. It can, and it does. Consumer biases and misperceptions aredynamic and can be influenced by market forces. Specifically, sellers caneducate or debias consumers through advertising. For example, until recently,imperfectly rational consumers paid little attention to late fees when shoppingfor a credit card. Now banks are competing over cardholders by advertisingtheir late-fee policies. Another example, noted in Nancy’s post, concerns earlytermination fees (ETFs) in cellphone contracts. Until recently, ETFs werenon-salient to consumers and a 2-year lock-in contract was the norm. Now manycarriers are advertising No Contract options. Nancy argues that the rise of NoContract is an imperfect market solution, and I agree that it is imperfect.Nonetheless, it shows how markets can respond to changes in consumer perception(and misperception) and, in some cases, lead these changes.

2. Normative Framework

Alan asks about the appropriate normative framework. As aneconomist, I am a welfarist. But I should emphasize that welfarism is verydifferent from utilitarianism. The welfarist cares about distributionaleffects; the utilitarian does not.

Since I focus my policy analysis on disclosure (see below),Alan infers that I care primarily about autonomy. But, as explained above, mynormative framework is welfarist. My preference for disclosure regulation restson the argument that optimally designed disclosures can enhance social welfare,by helping to overcome (or bypass) consumer biases and misperceptions.

This last point also responds to some of Alan’s critiques ofmy disclosure proposals. I agree with Alan that most existing disclosuremandates simply don’t work. But the fact that badly designed disclosures don’twork, doesn’t tell us very much about the potential benefits from well-designeddisclosure mandates. My goal was to come up with disclosures that will beeffective, given the imperfect rationality of consumers.

3. Legal Policy Response: The Role of Disclosure Regulation

The policy analysis in “Seduction by Contract” focuses ondisclosure regulation. This is not because disclosure always works and it isnot because disclosure, when it works, perfectly cures the behavioral marketfailure. I focus on disclosure, because I think it can help, when optimallydesigned; because often it is the most (and sometime the only) politicallyfeasible mode of regulation; and because it avoids certain costs associatedwith more paternalistic modes of regulation. To be clear, I do not argue thatmore paternalistic intervention is never warranted. And if I had the tenacityto write a longer book, I would definitely explore other regulatory approachesbeyond disclosure. Angela and Alan are disappointed by my focus on disclosure.I hope this response provides some (limited) reassurance.

Theanalysis of disclosure regulation in “Seduction by Contract” hopes to providesome guidance to lawmakers on how to optimally design disclosure mandates. Ibegin by emphasizing the importance of product use information, and product usedisclosures. Second, I outline two disclosure strategies that can helpimperfectly rational consumers. First, simple aggregate disclosures, like a“total cost of ownership” disclosure, can help consumers make better choices.Second, more comprehensive disclosures can be used, but these disclosures wouldbe targeted at sophisticated intermediaries, and would not be for direct“consumption” by imperfectly rational consumers.

[Posted, on Oren Bar-Gill’s behalf, by JT]