Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs

Abstract

Contrary to the predictions of conventional economic theory, firms often benefit by increasing consumer transaction costs. Firms do so by, for example, obscuring contract terms in a variety of ways, such as providing them after the contract is agreed to, enclosing them with other more interesting information, using small print, and omitting important terms from the written contract, such as fees for arbitration. Firms also take advantage of predictable consumer behaviors, such as the tendency of consumers not to seek rebates, to overload when provided with too much information, and to ignore dull information when overshadowed by vivid information. Using the approach of behavioral law and economics, the article provides examples of practices that inflate consumer transaction costs, explains why firms benefit from such practices, and describes the conditions giving rise to the practices. The piece also explains why inflated transaction costs are objectionable and explores the law's response to the problem of increased transaction costs. Finally, the article argues that law-makers should adopt a norm barring the unnecessary inflation of transaction costs and describes tests that law-makers can employ to implement such a norm.