Beyond the Black Box, or, When Shrouded Clauses Are Pro-Consumer

Abstract

This article compares two clauses in credit card contracts providing for alternative dispute resolution (ADR). Arbitration clauses use ADR to cut off consumer remedies, while reversal clauses use ADR to expand them. Holding constant the possibility of earning extra money by exploiting consumer biases, it is argued that the coexistence of these two clauses must be explained in terms of which aspects of a firm’s institutional structure leads it to instantiate this possibility. Viewing a firm as a forum to mediate the interests of the constituencies that either own or contract with it, one can ask how the aggregate interests of a firm’s constituencies (including consumers) affect its incentives to take advantage of consumer biases. Ownership can explain the low rate of arbitration clauses in credit union credit card contracts. Contracting patterns, specifically cross-elasticity of merchants and consumers, can explain the consumer friendliness of reversal clauses. Implications for analyzing credit card contracts and consumer regulation more broadly are discussed.

Keywords: credit cards, alternative dispute resolution, arbitration, shrouded clauses, consumer contracts, contracts, ownership, nexus of contracts