The Microfoundations of Standard Form Contracts: Price Discrimination Vs. Behavioral Bias

16 Pages Posted: 9 Mar 2004 Last revised: 28 Jan 2010

See all articles by Jonathan Klick

Jonathan Klick

University of Pennsylvania Law School; Erasmus School of Law; PERC - Property and Environment Research Center

Abstract

Standard form contracts, or contracts of adhesion, appear to provide contradictory evidence for the operation of bargaining in the markets where they are common. Non-negotiated contract terms that seemingly benefit sellers to the detriment of buyers call into question the efficiency implications of the Coase Theorem, which forms the foundation of positive law and economics. Proponents of the behavioral school of law and economics have suggested that behavioral biases, observed in experimental contexts, provide the most plausible explanation for standard form contracts. However, price discrimination might provide a more parsimonious explanation for abusive terms in contracts. If there is heterogeneity in the value consumers place on time, individuals will have differing propensities to bargain over individual terms, allowing sellers to extract greater surplus from high time value people through standard form contracts, while allowing low time value people to change individual contract terms. One of the major virtues of this explanation (and of standard economic theory in general) is that it generates testable hypotheses about cross-sectional variation. Specifically, the likelihood of a seller offering a standard form contract should increase: 1) as consumer heterogeneity increases; and 2) as arbitrage becomes increasingly costly.

Keywords: Price Discrimination, Contracts, Discount Rates

JEL Classification: K1, L1, D4, D8, C9

Suggested Citation

Klick, Jonathan, The Microfoundations of Standard Form Contracts: Price Discrimination Vs. Behavioral Bias. Florida State University Law Review, Vol. 32, p. 555, 2005; FSU College of Law, Public Law Research Paper No. 109. Available at SSRN: https://ssrn.com/abstract=515623 or http://dx.doi.org/10.2139/ssrn.515623

Jonathan Klick (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
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2157463455 (Phone)

Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

PERC - Property and Environment Research Center

2048 Analysis Drive
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Bozeman, MT 59718
United States

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