Default Difficulties: The Case for Regulatory Intervention in Merchants' Reliance on Default Rules that Harm Consumers

Abstract

This Note investigates how incomplete contracting between merchant parties may harm third-party consumers. After defining this phenomenon and noting several examples, this Note considers solutions to the social inefficiencies arising from these merchant-to-merchant contracts. To do so, this Note engages in a detailed case study of generic drug shortages and how incomplete failure-tosupply provisions affect patients' ability to access essential drugs. Such shortages typify the incomplete contracts at issue in this Note. Ultimately, this Note proposes a regulatory solution to firms' reliance on default rules that would reduce the incidence of extreme negative externalities on third parties.

Keywords: Default rules, merchants, contracts, externalities, shortages

JEL Classification: K12, K23, L65