Competition and Unconscionability
Northwestern University - Pritzker School of Law
February 6, 2013
Northwestern Law & Econ Research Paper No. 13-08
Conventional legal doctrine holds that courts should be more willing to find unconscionability in contracts when either one party has monopoly power or the other party was not given a choice of contract terms. This paper suggests that this doctrine is misguided on both points. I argue that the unconscionability doctrine should be used primarily to protect unsophisticated customers from exploitation, and show that when a seller has significant market power and offers one contract to all customers, fear of alienating sophisticated customers can discourage the seller from using inefficient contracts to exploit the unsophisticated. In contrast, in a more competitive industry, sellers may actually lose money on the sophisticated customers, and be willing to sacrifice sophisticated customers in order to more fully exploit the unsophisticated. Likewise, when a monopolist offers a choice of contracts, it is more attractive for it to exploit the unsophisticated while offering an efficient contract to the sophisticated. This paper presents a formal model showing that exploitation tends to increase with competition. Although competition leads to more inefficient exploitation, it also leads to lower prices, and the welfare effects on the unsophisticated are ambiguous.
Number of Pages in PDF File: 44
Keywords: Unconscionability, Competition, Bounded Rationality, Shrouded Attributes
JEL Classification: K10, K19, K30, K39
Date posted: March 10, 2013
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