Abstract

http://ssrn.com/abstract=2220271
 
 

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No Contract?


Oren Bar-Gill


Harvard Law School

Omri Ben-Shahar


University of Chicago Law School

February 16, 2013

NYU Law and Economics Research Paper No. 13-06
University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 636

Abstract:     
'No Contract' is on the rise in many consumer markets. Sellers are luring customers with the assurance that no commitment is required — that the consumer can terminate the service freely at any time, without paying a termination penalty. What explains the increasing prevalence of No Contract? Is it welfare enhancing? We examine the costs and benefits of No Contract, as compared to the lock-in alternative, and conclude that the rise of No Contract is generally desirable, a market response to consumers’ growing awareness and understanding of the costs of lock-in. We argue, however, that lock-ins continue to prevail less conspicuously, through loyalty programs that, like termination penalties, punish consumers for switching. Doctrinally, courts scrutinize lock-in contracts as penalty liquidated damages, and reduce these fees when excessive. We show that while courts’ skepticism of lock-in is generally justified, the doctrinal method is fundamentally misguided, resulting in inconsistent and welfare-reducing outcomes. In fact, with informed consumer choice disciplining sellers’ actions, as evidenced by the rise of No Contract, the need to regulated this type of lock-in contracts is diminishing. Consumers, however, are not as alert when joining loyalty programs, and the distortions arising form such lock-ins are heightened, rather than resolved, by competition. Courts and regulators should be focusing their attention on loyalty programs, not early termination fees.

Number of Pages in PDF File: 49

JEL Classification: K12, L14

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Date posted: February 18, 2013 ; Last revised: March 6, 2013

Suggested Citation

Bar-Gill, Oren and Ben-Shahar, Omri, No Contract? (February 16, 2013). NYU Law and Economics Research Paper No. 13-06; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 636. Available at SSRN: http://ssrn.com/abstract=2220271 or http://dx.doi.org/10.2139/ssrn.2220271

Contact Information

Oren Bar-Gill
Harvard Law School
1563 Massachusetts Avenue
Cambridge, MA 02138
United States
Omri Ben-Shahar (Contact Author)
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
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