Online Symposium on Oren Bar-Gill’s Seduction By Contract, Part IIIB: Nancy Kim on Cell Phone Contracts

This is the seventh 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.  Today is the second of a two-part contribution from our own Nancy Kim of the California Western School of Law.

Bar-Gill argues that the three part design of cell phone contracts (summarized in yesterday’s post) imposes welfare costs by preventing efficient switching of plansand discouraging comparison shopping and by regressively redistributing wealthfrom the consumers to carriers, and from lesser informed (and presumablypoorer) consumers to better informed (and presumably richer) consumers.  He also argues that market solutions arelimited as providers must respond to the biased demands of consumers or else bedriven out of the marketplace.

I tend to agree but only to apoint.  I do think in many markets, and thecell phone service market is one, consumers eventually wise up (i.e. after “bill shock”)and competition heats up in response to consumer dissatisfaction.   The problem is that it might take a while, andby the time consumers can muster up some momentum, the existing players havegotten bigger and more entrenched – and newer companies can’t compete in termsof marketing dollars.   In the cell phonespace, for example, Walt Mossberg of the Wall Street Journal, recently revieweda new upstart called Republic Wireless. The company’s offering is the exception tothe standard three part contract design – they offer no contract.  Furthermore, users pay for the phone inexchange for which they pay a very low monthly fee – only $19.  (Users also have the option of paying lessfor the phone and slightly more for the monthly service).  The catch? The reception itself isn’t as good because the technology isn’t quite thereyet – but it’s coming.  I think thebigger challenge for the company isn’t that calls sometimes get dropped – I useSprint and my calls get dropped all thetime! – it’s getting their name out there (Republic who?) and overcomingconsumer inertia.

Bar-Gill proposes disclosureregulation as a way to deal with problematic contract design.   He’s right to a certain extent – while disclosure hasbeen knocked as ineffective, the problem is really with the type of disclosureand not the notion of disclosure.  Inother words, we need the right kind ofinformation.  Bar-Gill proposes thatcarriers be required to disclose consumer use information (both specific to theconsumer based upon past use as well as use by others similar to the consumer)and total cost of ownership information which would be the total amount paid bythe consumer including overage charges on a yearly basis or over the durationof the plan.  He also proposes that therebe real time disclosures or warning so consumers know before they make that call that they are about to exceed their planlimit. 

While I like his proposals, Bar-Gillomits one very important aspect of disclosure (which I have written about inother articles, most recently this one) – and that is visual design.  In other words, effective disclosure should mean both the right information as well as the right presentation of that information. You can require all the relevant informationyou want but if consumers don’t notice it, then they won’t read it.  How theinformation is disclosed is just as important, in my view, as what information is disclosed.  Furthermore, in some markets, regulatory action of business practices (and not just disclosure regulation) may be required.

I could go on, but I’ve already taken up toomuch space.  Hopefully this review hassparked your interest and made you want to run out and buy your own copy.  Oren Bar-Gill has written a useful andthought provoking book and I think that it’s essential reading for contractsprofs (as is Margaret Jane Radin’s book, BOILERPLATE, which was also discussedon a different panel).

[Editor’s note: we expect to have an online symposium on Boilerplate in May)

[Posted, on Nancy’s behalf, by JT]