Consumer Lock-In and the Theory of the Firm

40 Pages Posted: 30 Jun 2012

See all articles by David G. Yosifon

David G. Yosifon

Santa Clara University - School of Law

Date Written: June 29, 2012

Abstract

When shareholders invest in a corporation they become “locked-in” to the prospects of that firm. A shareholder cannot force the firm to buy back her shares, nor can she force it to dissolve and turn over her pro rata share of its assets. She gets nothing for her capital unless the firm profits and pays dividends, or she finds someone else willing to buy her stock. Corporate law scholars have recognized that capital “lock-in” is both a corporate law solution that enables large-scale business to flourish, and a corporate law problem that threatens the growth and proper governance of big firms. In this Article I examine several ways in which consumers of corporate goods and services can, like shareholders, find themselves “locked-in” to consumption relationships with particular firms.

The advent of the modern corporation separated not only ownership from control but also production from consumption. The agency problem that arose between owners and managers also emerged between producers and consumers. Just as corporations needed to lock-in capital to sustain large-scale operations, so too did they need to lock-in consumers to justify the risks of asset-specific investment. Large corporate operations succeeded because they solved both the capital and consumer lock-in challenges. This aspect of consumption has gone unrecognized in corporate theory generally and normative accounts of desirable corporate governance in particular. My analysis suggests that market forces and external regulatory relief are inadequate salves to the consumer predicament that I describe. I conclude that a departure from the shareholder wealth maximization norm and an embrace of a multi-stakeholder corporate governance regime may be necessary to overcome agency problems associated with consumer lock-in.

Keywords: corporate law, corporations, corporate governance, corporate social responsibility, consumers, consumer protection, consumption, consumer theory, lock-in

Suggested Citation

Yosifon, David G., Consumer Lock-In and the Theory of the Firm (June 29, 2012). Seattle University Law Review, Vol. 35, p. 1429, 2012; Santa Clara Univ. Legal Studies Research Paper No. 06-12. Available at SSRN: https://ssrn.com/abstract=2096406

David G. Yosifon (Contact Author)

Santa Clara University - School of Law ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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