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Volumn 104, Issue 5, 2006, Pages 857-898

The return of bargain: An economic theory of how standard-form contracts enable cooperative negotiation between businesses and consumers

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EID: 33645306272     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review
Times cited : (44)

References (126)
  • 1
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    • Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions
    • My discussion of these "endgame" standard-form terms relies, for its inspiration and terminology, on
    • My discussion of these "endgame" standard-form terms relies, for its inspiration and terminology, on Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724 (2001).
    • (2001) MICH. L. REV. , vol.99 , pp. 1724
    • Bernstein, L.1
  • 2
    • 0038968074 scopus 로고
    • Contracts of Adhesion-Some Thoughts About Freedom of Contract
    • 631
    • Friedrich Kessler, Contracts of Adhesion-Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 631 (1943).
    • (1943) COLUM. L. REV. , vol.43 , pp. 629
    • Kessler, F.1
  • 3
    • 85082096037 scopus 로고
    • A Theory of the Consumer Product Warranty, 90 YALE L
    • George L. Priest, A Theory of the Consumer Product Warranty, 90 YALE L.J. 1297, 1299 (1981).
    • (1981) The Yale Law Journal , vol.1297 , pp. 1299
    • Priest, G.L.1
  • 4
    • 18044386439 scopus 로고
    • Contracts of Adhesion: An Essay in Reconstruction
    • 1225
    • Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1174, 1225 (1983).
    • (1983) HARV. L. REV , vol.96 , pp. 1174
    • Rakoff, T.D.1
  • 5
    • 85082092980 scopus 로고    scopus 로고
    • RESTATEMENT (SECOND) OF CONTRACTS § 17 (1981)
    • RESTATEMENT (SECOND) OF CONTRACTS § 17 (1981).
  • 6
    • 85082093491 scopus 로고    scopus 로고
    • The various rules on offer and acceptance are found at RESTATEMENT (SECOND) OF CONTRACTS §§ 24-70 (1981)
    • The various rules on offer and acceptance are found at RESTATEMENT (SECOND) OF CONTRACTS §§ 24-70 (1981).
  • 7
    • 85082094047 scopus 로고    scopus 로고
    • Kessler, supra note 2, at 632. Such a perception was widespread across the ideological spectrum, with Lord Devlin, hardly someone whom one would consider a great progressive, arguing stridently that "[i]f the modem lawyer had to single out the contract which now bears most marks of oppressive and unfair dealing, I think he would probably select one i n the mass of small print which the large concern thrusts upon the small man in a 'take it or leave it way.' " Patrick Devlin, The Enforcement of Morals 49 (1968, 1972 reprint)
    • Kessler, supra note 2, at 632. Such a perception was widespread across the ideological spectrum, with Lord Devlin, hardly someone whom one would consider a great progressive, arguing stridently that "[i]f the modem lawyer had to single out the contract which now bears most marks of oppressive and unfair dealing, I think he would probably select one i n the mass of small print which the large concern thrusts upon the small man in a 'take it or leave it way.' " Patrick Devlin, The Enforcement of Morals 49 (1968, 1972 reprint).
  • 8
    • 77951940419 scopus 로고
    • The Delivery of a Life-Insurance Policy
    • This term, as Kessler recounts, originated quite early in the twentieth century, with, 222, Kessler, supra note 2, at 632 n.11
    • This term, as Kessler recounts, originated quite early in the twentieth century, with Edwin W. Patterson, The Delivery of a Life-Insurance Policy, 33 HARV. L. REV. 198, 222 (1919). Kessler, supra note 2, at 632 n.11
    • (1919) HARV. L. REV. , vol.33 , pp. 198
    • Patterson, E.W.1
  • 9
    • 85082095742 scopus 로고    scopus 로고
    • Priest, supra note 3, at 1300-02
    • Priest, supra note 3, at 1300-02.
  • 10
    • 79251629929 scopus 로고
    • Mass Contracts: Lawful Fraud in California
    • W. David Slawson, Mass Contracts: Lawful Fraud in California, 48 S. CAL. L. REV. 1, 12 (1974).
    • (1974) S. CAL. L. REV. , vol.48 , Issue.1 , pp. 12
    • David Slawson, W.1
  • 11
    • 85055762401 scopus 로고    scopus 로고
    • Law and the Consumer Transaction: A Case Study of the Automobile Warranty
    • William C. Whitford, Law and the Consumer Transaction: A Case Study of the Automobile Warranty, 1968 WIS. L. REV. 1006.
    • WIS. L. REV. , vol.1968 , pp. 1006
    • Whitford, W.C.1
  • 12
    • 85082094599 scopus 로고    scopus 로고
    • 1 61 A.2d 69 (N.J. 1960)
    • 61 A.2d 69 (N.J. 1960).
  • 13
    • 85082095453 scopus 로고    scopus 로고
    • Id. at 87
    • Id. at 87.
  • 14
    • 85082093205 scopus 로고    scopus 로고
    • See, e.g., Galligan v. Arovitch, 2 1 9 A.2d 463 (Pa. 1 966)
    • See, e.g., Galligan v. Arovitch, 2 1 9 A.2d 463 (Pa. 1 966).
  • 15
    • 85082093271 scopus 로고    scopus 로고
    • See, e.g., Priest, supra note 3, at 1 309
    • See, e.g., Priest, supra note 3, at 1 309.
  • 16
    • 85082094479 scopus 로고    scopus 로고
    • For instance, in Ciofalo v. Vic Tanney Gyms, Inc., 1 77 N.E.2d 925, 927 (N.Y. 1 96 1), the court enforced a liability disclaimer in a gym membership agreement, stating that "[h]ere there is no special legal relationship and no overriding public interest which demand that this contract provision, voluntarily entered into by competent parties, should be rendered ineffectual."
    • For instance, in Ciofalo v. Vic Tanney Gyms, Inc., 1 77 N.E.2d 925, 927 (N.Y. 1 96 1), the court enforced a liability disclaimer in a gym membership agreement, stating that "[h]ere there is no special legal relationship and no overriding public interest which demand that this contract provision, voluntarily entered into by competent parties, should be rendered ineffectual."
  • 17
    • 85082094886 scopus 로고    scopus 로고
    • With the classic statement of this attitude, leading to invalidation of a standard-form consumer-installment sales contract's cross-collateralization clause, being Williams v. Walker­Thomas Furniture Co., 350 F.2d 445 (D.D.C. 1965)
    • With the classic statement of this attitude, leading to invalidation of a standard-form consumer-installment sales contract's cross-collateralization clause, being Williams v. Walker­Thomas Furniture Co., 350 F.2d 445 (D.D.C. 1965).
  • 18
    • 85082095895 scopus 로고    scopus 로고
    • See Rakoff, supra note 4, at 1248-83
    • See Rakoff, supra note 4, at 1248-83.
  • 19
    • 0346226006 scopus 로고
    • Imperfect Information in Markets for Contract Terms: T he Examples of Warranties and Security Interests
    • The seminal presentation of this claim to the legal academy is
    • The seminal presentation of this claim to the legal academy is Alan Schwartz, Louis L. Wilde, Imperfect Information in Markets for Contract Terms: T he Examples of Warranties and Security Interests, 69 VA. L. REV. 1387 (1983).
    • (1983) VA. L. REV. , vol.69 , pp. 1387
    • Schwartz, A.1    Wilde, L.L.2
  • 20
    • 85082094863 scopus 로고    scopus 로고
    • Priest, supra note 3, at 1298
    • Priest, supra note 3, at 1298.
  • 21
    • 85082094522 scopus 로고    scopus 로고
    • See, e.g., Jeffrey Davis, Revamping Consumer-Credit Contract Law, 68 VA. L. REV. 1333, 1345 (1982) (arguing that some credit suppliers are immune to market pressures, which are in any event significantly attenuated because too small a proportion of consumers shop for desirable credit terms)
    • See, e.g., Jeffrey Davis, Revamping Consumer-Credit Contract Law, 68 VA. L. REV. 1333, 1345 (1982) (arguing that some credit suppliers are immune to market pressures, which are in any event significantly attenuated because too small a proportion of consumers shop for desirable credit terms).
  • 22
    • 0036970577 scopus 로고    scopus 로고
    • Consenting to Form Contracts
    • Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991) (citations omitted) (relying on and citing the reasoning in Nw. Nat'! Ins. Co. v. Donovan, 916 F.2d 372, 378 (7th Cir. 1990)). For an argument that the market assent reasoning in Shute and similar cases is consistent with classical contract notions of assent
    • Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991) (citations omitted) (relying on and citing the reasoning in Nw. Nat'! Ins. Co. v. Donovan, 916 F.2d 372, 378 (7th Cir. 1990)). For an argument that the market assent reasoning in Shute and similar cases is consistent with classical contract notions of assent, see Randy E. Barnett, Consenting to Form Contracts, 71 FORDHAM L. REV. 627 (2002).
    • (2002) FORDHAM L. REV. , vol.71 , pp. 627
    • Barnett, R.E.1
  • 23
    • 85082093662 scopus 로고    scopus 로고
    • Codified at 9 U.S.C. §§ 1-14, 201--08
    • Codified at 9 U.S.C. §§ 1-14, 201--08.
  • 24
    • 0036327974 scopus 로고    scopus 로고
    • Standard-Form Contracting in the Electronic Age
    • See, e.g., Robert A. Hillman, Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. REv. 429 (2002);
    • (2002) N.Y.U. L. Rev. , vol.77 , pp. 429
    • Hillman, R.A.1    Rachlinski, J.J.2
  • 25
    • 0742271634 scopus 로고    scopus 로고
    • Bounded Rationality, Standard-form Contracts, and Unconscionability
    • Russell Korobkin, Bounded Rationality, Standard-form Contracts, and Unconscionability, 70 U. Cm. L. REV. 1203 (2003).
    • (2003) U. Cm. L. REV. , vol.70 , pp. 1203
    • Korobkin, R.1
  • 26
    • 85082093151 scopus 로고    scopus 로고
    • I stress that this is merely a selection. A closer look at many other industries would, I believe, reveal the same pattern. There is, for instance, evidence that people negotiate with their cell phone carriers, post-contract. CBS online encourages people to "[n]egotiate with your carrier. If you see a cheaper deal somewhere else, call your carrier and see if it will offer you something similar. Carriers are anxious to keep you as a customer, so it never hurts to ask for a better deal." Become a Happier Cell Phone Owner, CBS NEWS, Mar. 10, 2005
    • I stress that this is merely a selection. A closer look at many other industries would, I believe, reveal the same pattern. There is, for instance, evidence that people negotiate with their cell phone carriers, post-contract. CBS online encourages people to "[n]egotiate with your carrier. If you see a cheaper deal somewhere else, call your carrier and see if it will offer you something similar. Carriers are anxious to keep you as a customer, so it never hurts to ask for a better deal." Become a Happier Cell Phone Owner, CBS NEWS, Mar. 10, 2005, http://www.cbsnews.com/stories/2005/03/10/earlyshow/living/money/main679246.shtml.
  • 27
    • 77952100933 scopus 로고    scopus 로고
    • Hospital Bills Spin Out of Control
    • Apr. 13, at Al
    • Julie Appleby, Hospital Bills Spin Out of Control, USA TODAY, Apr. 13, 2004, at Al.
    • (2004) USA TODAY
    • Appleby, J.1
  • 28
    • 85082098829 scopus 로고    scopus 로고
    • Reducing Hospital Bills, Dollar Stretcher, http://www.stretcher.com/stories/980923c.cfm (last visited Nov. 20, 2005)
    • Reducing Hospital Bills, Dollar Stretcher, http://www.stretcher.com/stories/980923c.cfm (last visited Nov. 20, 2005).
  • 29
    • 0018179063 scopus 로고
    • Screen Outpatients for Better Collections
    • 32. The author recommends having the computer select out nonpayers from the patient population and then interviewing such patients individually before treatment to try to identify their ability to pay and to work out individualized monthly payment plans as a precondition for receiving treatment (excepting, of course, the "obviously ill"). He estimates that one account representative can conduct about forty ten-minute interviews per day and that such interviews conservatively will bring in 10% of past-due accounts that would otherwise not come in. Id. at 33
    • See, e.g., Roger J. Hull, Screen Outpatients for Better Collections, HosP. FIN. MGMT., Nov. 1978, at 32, 32. The author recommends having the computer select out nonpayers from the patient population and then interviewing such patients individually before treatment to try to identify their ability to pay and to work out individualized monthly payment plans as a precondition for receiving treatment (excepting, of course, the "obviously ill"). He estimates that one account representative can conduct about forty ten-minute interviews per day and that such interviews conservatively will bring in 10% of past-due accounts that would otherwise not come in. Id. at 33.
    • (1978) Hosp. FIN. MGMT. , pp. 32
    • Hull, R.J.1
  • 30
    • 85082093015 scopus 로고    scopus 로고
    • The Dollar Stretcher, supra note 27
    • The Dollar Stretcher, supra note 27.
  • 31
    • 85082099365 scopus 로고    scopus 로고
    • Id. Another former employee noted, "[Hospitals] don't want to have to send you to collection-it's much better for them to get the full amount, even if it takes longer (collection agencies take a percentage). I've seen payment plans as little as $25 a month." Id
    • Id. Another former employee noted, "[Hospitals] don't want to have to send you to collection-it's much better for them to get the full amount, even if it takes longer (collection agencies take a percentage). I've seen payment plans as little as $25 a month." Id.
  • 32
    • 85082095257 scopus 로고    scopus 로고
    • Familydoctor.org, Am. Acad of Family Physicians, Financial Management During Crisis, (last visited Nov. 20, 2005)
    • Familydoctor.org, Am. Acad of Family Physicians, Financial Management During Crisis, http://www.kidshealth.org/PageManager.jsp?dn=familydoctor&lic=44&article_set=21736 (last visited Nov. 20, 2005).
  • 33
    • 85082093907 scopus 로고    scopus 로고
    • Harris Interactive, "Haggling" with Health Care Providers About Their Prices Likely to Increase Sharply as Out-of-Pocket Costs Rise (Mar. 6, 2002), http://www.harrisinteractive.com/news/allnewsbydate.asp?NewsID=443. The questions and charts in the body of this Article are excerpted directly from the website
    • Harris Interactive, "Haggling" with Health Care Providers About Their Prices Likely to Increase Sharply as Out-of-Pocket Costs Rise (Mar. 6, 2002), http://www.harrisinteractive.com/news/allnewsbydate.asp?NewsID=443. The questions and charts in the body of this Article are excerpted directly from the website.
  • 34
    • 85082093539 scopus 로고    scopus 로고
    • This figure reflects total outstanding revolving debt as of January 2005. Fed. Reserve, Consumer Credit: January 2005, FED. REs. STAT. RELEASE, Mar. 7, 2005, available at http://www. federalreserve. gov/releases/g 1 9/20050307lg1 9.pdf
    • This figure reflects total outstanding revolving debt as of January 2005. Fed. Reserve, Consumer Credit: January 2005, FED. REs. STAT. RELEASE, Mar. 7, 2005, available at http://www. federalreserve. gov/releases/g 1 9/20050307lg1 9.pdf.
  • 35
    • 85082095933 scopus 로고    scopus 로고
    • As reported in the most recently available Survey of Consumer Finances. See Anna M. Aizcorbe et al., Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, 89 FED. RES. BULL. I, 24 (2003)
    • As reported in the most recently available Survey of Consumer Finances. See Anna M. Aizcorbe et al., Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, 89 FED. RES. BULL. I, 24 (2003).
  • 36
    • 85082093213 scopus 로고    scopus 로고
    • The examples used here are the terms, available online, of the Citi Gold/AAdvantage World Mastercard. See Citi Cards Products, Terms and Conditions, http://www.citibank.com/us/cards/cardserv/worldcard/gold.jsp (follow "Terms & Conditions" hyperlink) (last visited Nov. 20, 2005)
    • The examples used here are the terms, available online, of the Citi Gold/AAdvantage World Mastercard. See Citi Cards Products, Terms and Conditions, http://www.citibank.com/us/cards/cardserv/worldcard/gold.jsp (follow "Terms & Conditions" hyperlink) (last visited Nov. 20, 2005).
  • 37
    • 85082095039 scopus 로고    scopus 로고
    • Personal Business: Universal Default Can Snare Cardholders
    • Id. The so-called "universal default" provision has recently come under intense criticism from consumer groups and some members of Congress, and the Comptroller of the Currency has issued an advisory letter calling for more transparent disclosure of the universal default term
    • Id. The so-called "universal default" provision has recently come under intense criticism from consumer groups and some members of Congress, and the Comptroller of the Currency has issued an advisory letter calling for more transparent disclosure of the universal default term. See Andrew Blackman, Personal Business: Universal Default Can Snare Cardholders, WALL ST. J., Feb. 20, 2005, at 4;
    • (2005) WALL ST. J. , pp. 4
    • Blackman, A.1
  • 38
    • 84925161384 scopus 로고    scopus 로고
    • Getting Tough?
    • Linda Punch, Getting Tough?, CREDIT CARD MGMT., Feb. 2005, at 42.
    • (2005) CREDIT CARD MGMT. , pp. 42
    • Punch, L.1
  • 40
    • 85082095449 scopus 로고    scopus 로고
    • SuzE ORMAN, THE MONEY BOOK FOR THE YOUNG, FABULOUS & BROKE 88-89 (2005) (encourages using the threat of transfer to get a lower credit-card rate); STEVEN STRAUSS & AzRIELA JAFFE, THE COMPLETE IDIOT'S GUIDE TO BEATING DEBT 8 1-90 (2000) (an entire chapter on negotiating with creditors); ERIC TYSON, PERSONAL FINANCE FOR DUMMIES 76 (4th ed. 2003) (encouraging negotiation with creditors)
    • SuzE ORMAN, THE MONEY BOOK FOR THE YOUNG, FABULOUS & BROKE 88-89 (2005) (encourages using the threat of transfer to get a lower credit-card rate); STEVEN STRAUSS & AzRIELA JAFFE, THE COMPLETE IDIOT'S GUIDE TO BEATING DEBT 8 1-90 (2000) (an entire chapter on negotiating with creditors); ERIC TYSON, PERSONAL FINANCE FOR DUMMIES 76 (4th ed. 2003) (encouraging negotiation with creditors).
  • 41
    • 85082098977 scopus 로고    scopus 로고
    • Office of the Comptroller of the Currency et al., Credit Card Lending (2002) (draft guidance) [hereinafter Draft Guidance], available at http://www.ots.treas. gov/docs/4/48908.pdf. The final version is now available. OFFICE OF THE COMPTROLLER OF THE CURRENCY ET AL., CREDIT CARD LENDING (2003), available at http://www.occ.treas.gov/ftp/bulletin/2003-la.pdf
    • Office of the Comptroller of the Currency et al., Credit Card Lending (2002) (draft guidance) [hereinafter Draft Guidance], available at http://www.ots.treas. gov/docs/4/48908.pdf. The final version is now available. OFFICE OF THE COMPTROLLER OF THE CURRENCY ET AL., CREDIT CARD LENDING (2003), available at http://www.occ.treas.gov/ftp/bulletin/2003-la.pdf.
  • 42
    • 85082098077 scopus 로고    scopus 로고
    • Draft Guidance, supra note 40, at 3 n. l
    • Draft Guidance, supra note 40, at 3 n. l.
  • 43
    • 85082097691 scopus 로고    scopus 로고
    • Id. at 3
    • Id. at 3.
  • 44
    • 85082097398 scopus 로고    scopus 로고
    • More precisely, the Draft Guidance stated: Workout programs should be designed to maximize principal reduction. Debt management plans developed by consumer credit counseling services generally strive to have borrowers repay credit card debt within 48 months. Repayment terms for workout programs should be generally consistent with these time frames, with exceptions clearly documented and supported by compell ing evidence that less conservative terms and conditions are warranted. To meet these time frames, institutions may need to substantially reduce or eliminate interest rates and fees so that more of the payment is applied to reduce principal
    • More precisely, the Draft Guidance stated: Workout programs should be designed to maximize principal reduction. Debt management plans developed by consumer credit counseling services generally strive to have borrowers repay credit card debt within 48 months. Repayment terms for workout programs should be generally consistent with these time frames, with exceptions clearly documented and supported by compell ing evidence that less conservative terms and conditions are warranted. To meet these time frames, institutions may need to substantially reduce or eliminate interest rates and fees so that more of the payment is applied to reduce principal.
  • 45
    • 85082095498 scopus 로고    scopus 로고
    • Letter from Paul A Smith, Senior Counsel, Am. Bankers Ass'n, to David D. Gibbons, Deputy Comptroller for Credit Risk, Office of the Comptroller of Currency, et al. 2 (Sept. 23, 2002), available at http://www.aba.com/NR/rdonlyres/DC65CE1 2-BlC7-J ID4-AB4A00508B95258D/26583/CreditCardLendingGuidancefinalcmt9230993.pdf; see also Letter on Behalf of the Financial Services Roundtable (Sept. 23, 2002) (on file with author)
    • Letter from Paul A Smith, Senior Counsel, Am. Bankers Ass'n, to David D. Gibbons, Deputy Comptroller for Credit Risk, Office of the Comptroller of Currency, et al. 2 (Sept. 23, 2002), available at http://www.aba.com/NR/rdonlyres/DC65CE1 2-BlC7-J ID4-AB4A00508B95258D/26583/CreditCardLendingGuidancefinalcmt9230993.pdf; see also Letter on Behalf of the Financial Services Roundtable (Sept. 23, 2002) (on file with author).
  • 46
    • 85082096889 scopus 로고    scopus 로고
    • Letter from Paul A Smith to David G. Gibbons et al., supra note 44, at 4, 5
    • Letter from Paul A Smith to David G. Gibbons et al., supra note 44, at 4, 5.
  • 47
    • 85082095960 scopus 로고    scopus 로고
    • Id. at 5
    • Id. at 5.
  • 48
    • 85082095606 scopus 로고    scopus 로고
    • Id. at 6
    • Id. at 6.
  • 49
    • 85082094629 scopus 로고    scopus 로고
    • Letter on Behalf of the Financial Services Roundtable, supra note 44, at 2
    • Letter on Behalf of the Financial Services Roundtable, supra note 44, at 2.
  • 50
    • 85082094463 scopus 로고    scopus 로고
    • See The Federal Housing Administration Single Family Program Property Disposition: Hearing Before the Subcomm on Haus. and Cmty. Opportunity of the H. Comm. on Banking and Fin. Serv., 105th Cong. (Apr. I, 1 998) (Statement of Michael A. Quinn, Senior Vice President, Credit Loss Management, Fannie Mae), available at, (last visited Nov. 20, 2005) (describing home-loan workouts)
    • See The Federal Housing Administration Single Family Program Property Disposition: Hearing Before the Subcomm on Haus. and Cmty. Opportunity of the H. Comm. on Banking and Fin. Serv., 105th Cong. (Apr. I, 1 998) (Statement of Michael A. Quinn, Senior Vice President, Credit Loss Management, Fannie Mae), available at http://financialservices.house.gov/banking/4198quin.htm (last visited Nov. 20, 2005) (describing home-loan workouts).
  • 51
    • 85082093106 scopus 로고    scopus 로고
    • "Workout" to Prevent Home Foreclosures
    • July 22
    • Terri Cullen, "Workout" to Prevent Home Foreclosures, REAL ESTATE J., July 22, 2005, http://www.realestatejoumal.com/buysell/mortgages/200S0722-cullen.html.
    • (2005) REAL ESTATE J.
    • Cullen, T.1
  • 52
    • 85082094495 scopus 로고    scopus 로고
    • See, e.g., Foreclosureaid.com, http://www.foreclosureaid.com (last visited Nov. 20, 2005) (proclaiming itself the "[l]eading [f]oreclosures [s]ite on the [n]et"); Steven Wolpem, A Basic Guide to Families Facing Foreclosure, DoLLAR STRETCHER, http://www.stretcher.com/stories/99051 ?m.cfm (last visited Nov. 20, 2005)
    • See, e.g., Foreclosureaid.com, http://www.foreclosureaid.com (last visited Nov. 20, 2005) (proclaiming itself the "[l]eading [f]oreclosures [s]ite on the [n]et"); Steven Wolpem, A Basic Guide to Families Facing Foreclosure, DoLLAR STRETCHER, http://www.stretcher.com/stories/99051 ?m.cfm (last visited Nov. 20, 2005).
  • 53
    • 85082095838 scopus 로고    scopus 로고
    • For an example of large lenders' promises, see Ameriquest Mortgage Co., Ameriquest's "Best Practices" Policy, http://www.ameriquestmortgage.com/press.html (last visited Nov. 20, 2005) ("We want customers to stay in their homes. Specially trained home retention-associates [sic] evaluate all loans before the foreclosure process begins to ensure that a variety of workout options have been explored. Their sole responsibility is to make home retention strategies work."), and Wells Fargo, Responsible Lending for Non-Prime U. S. Real Estate Loans, http://financial.wellsfargo.com/responsible (last visited Nov. 20, 200S) ("We work diligently using our workout and repayment plans to help bring accounts current and mitigate losses.")
    • For an example of large lenders' promises, see Ameriquest Mortgage Co., Ameriquest's "Best Practices" Policy, http://www.ameriquestmortgage.com/press.html (last visited Nov. 20, 2005) ("We want customers to stay in their homes. Specially trained home retention-associates [sic] evaluate all loans before the foreclosure process begins to ensure that a variety of workout options have been explored. Their sole responsibility is to make home retention strategies work."), and Wells Fargo, Responsible Lending for Non-Prime U. S. Real Estate Loans, http://financial.wellsfargo.com/responsible (last visited Nov. 20, 200S) ("We work diligently using our workout and repayment plans to help bring accounts current and mitigate losses.").
  • 54
    • 85082098877 scopus 로고    scopus 로고
    • Wells Fargo, supra note 52
    • Wells Fargo, supra note 52.
  • 55
    • 85082094336 scopus 로고    scopus 로고
    • Fannie Mae, Expanding the American Dream Commitment, http://www.fanniemae.com/initiatives/adc/index.jhtml?p=lnitiatives&s=Expanding+the+American+Dream+Commitment (last visited Nov. 28, 2005)
    • S4. Fannie Mae, Expanding the American Dream Commitment, http://www.fanniemae.com/initiatives/adc/index.jhtml?p=lnitiatives&s=Expanding+the+American+Dream+Commitment (last visited Nov. 28, 2005).
  • 56
    • 85082093073 scopus 로고    scopus 로고
    • NEIGHBORHOOD Hous. SERVS., MASS. DEP'T OF Hous. AND CMTY. DEV., DELINQUENCY Poucrns AND PROCEDURES GumE, available at , (last visited Nov. 1 9, 2005)
    • SS. NEIGHBORHOOD Hous. SERVS., MASS. DEP'T OF Hous. AND CMTY. DEV., DELINQUENCY Poucrns AND PROCEDURES GumE, available at http://www.mass.gov/dhcd/components/cs/lPrgApps/NHS/DelProGd.pdf (last visited Nov. 1 9, 2005).
  • 57
    • 0036015264 scopus 로고    scopus 로고
    • Customer Experience with Rent-to-Own Transactions
    • The description of the rent-to-own contract that follows is also drawn from this article
    • James M. Lacko et al., Customer Experience with Rent-to-Own Transactions, 21 J. Pue. PoL' Y & MARKETING 126 (2002). The description of the rent-to-own contract that follows is also drawn from this article.
    • (2002) J. Pue. Pol' Y & MARKETING , vol.21 , pp. 126
    • Lacko, J.M.1
  • 58
    • 0000214198 scopus 로고    scopus 로고
    • Demand for Rent-to-Own Contracts: A Behavioral Economic Explanation
    • 201, (based on their survey and existing evidence, rent-to-own purchase payments are generally two to four times the purchase price with an implicit interest rate well over 100%; demand for rent-to-own even at these prices is a response by low-and moderate-income consumers to income and expense shocks and also a personal financial management tool to overcome myopic preferences)
    • See Brian J. Zikmund-Fisher & Andrew M. Parker, Demand for Rent-to-Own Contracts: A Behavioral Economic Explanation, 38 J. EcoN. BEHAVIOR & ORG. 199. 201 (1999) (based on their survey and existing evidence, rent-to-own purchase payments are generally two to four times the purchase price with an implicit interest rate well over 100%; demand for rent-to-own even at these prices is a response by low-and moderate-income consumers to income and expense shocks and also a personal financial management tool to overcome myopic preferences).
    • (1999) J. Econ. BEHAVIOR & ORG. , vol.38 , pp. 199
    • Zikmund-Fisher, B.J.1    Parker, A.M.2
  • 59
    • 0010149815 scopus 로고
    • Peddling Dreams: A Marketing Giant Uses Its Sales Prowess to Profit on Poverty
    • at Al
    • Alix M. Freedman, Peddling Dreams: A Marketing Giant Uses Its Sales Prowess to Profit on Poverty, WALL ST. J., Sept. 22, 1993, at Al.
    • (1993) WALL ST. J., Sept. , vol.22
    • Freedman, A.M.1
  • 60
    • 85082093537 scopus 로고    scopus 로고
    • Compare JAMES M. LACKO ET AL., FED. TRADE CoMM' N, SURVEY OF RENT-TO-OWN CUSTOMERS (2000), available at http://www.ftc.gov/reports/renttoown/renttoownr.pdf; Lacko et. al., supra note 56; and Signe-Mary McKernan et al., Empirical Evidence on the Detenninants of Rent-to-Own Use and Purchase Behavior, 1 7 ECON. DEV. Q. 22 (2003); with Michael H. Anderson & Raymond Jackson, A Consideration of Rent-to-Own, 35 J. CONSUMER AFFAIRS 295 (2001), and Michael H. Anderson & Raymond Jackson, Rent-to-Own Agreements: Purchases or Rentals? (U. Mass. Dartmouth, 2003), available at http://www.apro-rto.com/legalchannel/pdfs/studies/JABR_paper.pdf
    • Compare JAMES M. LACKO ET AL., FED. TRADE CoMM' N, SURVEY OF RENT-TO-OWN CUSTOMERS (2000), available at http://www.ftc.gov/reports/renttoown/renttoownr.pdf; Lacko et. al., supra note 56; and Signe-Mary McKernan et al., Empirical Evidence on the Detenninants of Rent-to-Own Use and Purchase Behavior, 1 7 ECON. DEV. Q. 22 (2003); with Michael H. Anderson & Raymond Jackson, A Consideration of Rent-to-Own, 35 J. CONSUMER AFFAIRS 295 (2001), and Michael H. Anderson & Raymond Jackson, Rent-to-Own Agreements: Purchases or Rentals? (U. Mass. Dartmouth, 2003), available at http://www.apro-rto.com/legalchannel/pdfs/studies/JABR_paper.pdf.
  • 61
    • 85082095571 scopus 로고    scopus 로고
    • For a discussion of the state decisions and proposed federal legislation, see Ed Winn III, Capitol Steps, PROGRESSIVE RENTALS, July-Aug. 2004, at 3 1; Ed Winn III, States vs. Feds: Preemption Demystified, PROGRESSIVE RENTALS, May-June, 2003, at 46; and Ed Winn III, The Hill is Alive with the Sound of RTO, PROGRESSIVE RENTALS, July-Aug. 2002, at 35
    • For a discussion of the state decisions and proposed federal legislation, see Ed Winn III, Capitol Steps, PROGRESSIVE RENTALS, July-Aug. 2004, at 3 1; Ed Winn III, States vs. Feds: Preemption Demystified, PROGRESSIVE RENTALS, May-June, 2003, at 46; and Ed Winn III, The Hill is Alive with the Sound of RTO, PROGRESSIVE RENTALS, July-Aug. 2002, at 35.
  • 62
    • 85082094034 scopus 로고    scopus 로고
    • See Lacko et al., supra note 56, at 1 33; McKeman et. al., supra note 59, at 34. Thus it would be a grave error to take the furniture company in Williams v. Walker Thomas Funiture Co.­ which had filed close to one hundred writs of replevin each year for a decade prior to that litigation, Eben Colby, What did the Doctrine of Unconscionability do to the Walker-Thomas Furniture Company?, 34 Conn. L. Rev. 625, 656 (2002)-as representative of the average rent-to-own firm today. This is yet another instance of the well-known unrepresentativeness of legal di sputes that generate published appellate opinions, and a caution against basing legal reforms on the very unusual facts of such disputes
    • See Lacko et al., supra note 56, at 1 33; McKeman et. al., supra note 59, at 34. Thus it would be a grave error to take the furniture company in Williams v. Walker Thomas Funiture Co.­ which had filed close to one hundred writs of replevin each year for a decade prior to that litigation, Eben Colby, What did the Doctrine of Unconscionability do to the Walker-Thomas Furniture Company?, 34 Conn. L. Rev. 625, 656 (2002)-as representative of the average rent-to-own firm today. This is yet another instance of the well-known unrepresentativeness of legal di sputes that generate published appellate opinions, and a caution against basing legal reforms on the very unusual facts of such disputes.
  • 63
    • 85082095462 scopus 로고    scopus 로고
    • In New York, for example, retail stores may establish and enforce a no-cash and no-credit-card refund policy, but the retailer must announce its policy with "conspicuous signs" visible from each cash register or from the store entrance for the policy to be enforceable under state consumer protection statutes. See Baker v. Burlington Coat Factory Warehouse, 673 N. Y.S.2d 28 1, 283 (N.Y. City Ct. 1998)
    • In New York, for example, retail stores may establish and enforce a no-cash and no-credit-card refund policy, but the retailer must announce its policy with "conspicuous signs" visible from each cash register or from the store entrance for the policy to be enforceable under state consumer protection statutes. See Baker v. Burlington Coat Factory Warehouse, 673 N. Y.S.2d 28 1, 283 (N.Y. City Ct. 1998).
  • 64
    • 0035534148 scopus 로고    scopus 로고
    • Remote Purchase Environments: The Influence of Return Policy Leniency on Tw o-Stage Decision Processes
    • 159
    • Stacy L. Wood, Remote Purchase Environments: The Influence of Return Policy Leniency on Tw o-Stage Decision Processes, 38 J. MKTG. RES. 157, 159 (2001).
    • (2001) J. MKTG. RES. , vol.38 , pp. 157
    • Wood, S.L.1
  • 65
    • 85082097184 scopus 로고    scopus 로고
    • See Charles Passy, Cranky Consumer: Get Set for Many Unhappy Returns, WALL ST. J., Nov. 1 2, 2002, at 02; see also Lisa Kalis, Catalog Critic: Bathrobes Get the Spa Treatment, WALL ST. J., Aug. 20, 2004, at W4 (reviewing sellers of high-end, spa-quality bathrobes whose return periods vary from thirty to ninety days)
    • See Charles Passy, Cranky Consumer: Get Set for Many Unhappy Returns, WALL ST. J., Nov. 1 2, 2002, at 02; see also Lisa Kalis, Catalog Critic: Bathrobes Get the Spa Treatment, WALL ST. J., Aug. 20, 2004, at W4 (reviewing sellers of high-end, spa-quality bathrobes whose return periods vary from thirty to ninety days).
  • 66
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    • How Philips Reduced Returns
    • 33
    • Tony Scianutta, How Philips Reduced Returns, 7 SUPPLY CHAIN MGMT. REv. 32, 33 (2003).
    • (2003) SUPPLY CHAIN MGMT. Rev. , vol.7 , pp. 32
    • Scianutta, T.1
  • 67
    • 85082093107 scopus 로고    scopus 로고
    • Id. at 36 (discussing new policies by retailers, such as posting their return policy in plain sight of consumers)
    • Id. at 36 (discussing new policies by retailers, such as posting their return policy in plain sight of consumers).
  • 68
    • 85082097848 scopus 로고    scopus 로고
    • Wood, supra note 63, at 1 57
    • Wood, supra note 63, at 1 57.
  • 69
    • 85082097238 scopus 로고    scopus 로고
    • See Evan Schuman, The War Against Retail Return Abuses, EWEEK, Dec. 1 7, 2004, http://www.eweek.com/article2/0, 1 759, 1743671,00.asp; see also Michele Chandler, Retail Return Fraud Wearing Thin: Technology Helps Weed Out Abusers, MESSENGER-INQUIRER, Mar. 1 3, 2005, http://www.messenger-inquirer.com/features/business/8207494.htm
    • See Evan Schuman, The War Against Retail Return Abuses, EWEEK, Dec. 1 7, 2004, http://www.eweek.com/article2/0, 1 759, 1743671,00.asp; see also Michele Chandler, Retail Return Fraud Wearing Thin: Technology Helps Weed Out Abusers, MESSENGER-INQUIRER, Mar. 1 3, 2005, http://www.messenger-inquirer.com/features/business/8207494.htm.
  • 70
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    • Schuman, supra note 69
    • Schuman, supra note 69.
  • 71
    • 85082096908 scopus 로고    scopus 로고
    • There has long been clear evidence that firms generally respond to consumers' product complaints in ways that consumers consider to be satisfactory. See Jean Braucher, An Informal Resolution Model of Consumer Product Warranty Law, 1 985 Wis. L. REV. 1405, 1447-57. For more formal models of how firms use return policies to lower the consumer's risk of buying a defective product and thereby keep the business of high value, repeat consumers, see Yeon-Koo Che, Customer Return Policies for Experience Goods, 44 J. INDUS. EcoN. 17 (1996) and Claes Fornell & Birger Wernerfelt, A Model fo r Customer Complaint Management, 7 MARKET. Sci. 287 (1988)
    • There has long been clear evidence that firms generally respond to consumers' product complaints in ways that consumers consider to be satisfactory. See Jean Braucher, An Informal Resolution Model of Consumer Product Warranty Law, 1 985 Wis. L. REV. 1405, 1447-57. For more formal models of how firms use return policies to lower the consumer's risk of buying a defective product and thereby keep the business of high value, repeat consumers, see Yeon-Koo Che, Customer Return Policies for Experience Goods, 44 J. INDUS. EcoN. 17 (1996) and Claes Fornell & Birger Wernerfelt, A Model fo r Customer Complaint Management, 7 MARKET. Sci. 287 (1988).
  • 72
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    • A Critical Incident Approach to the Examination of Customer Relationship Management in a Retail Chain: An Exploratory Study
    • For evidence on how customer satisfaction generally leads to repeat business and positive word-of-mouth communications, 249
    • For evidence on how customer satisfaction generally leads to repeat business and positive word-of-mouth communications, see Amy Wong & Amrik Sohal, A Critical Incident Approach to the Examination of Customer Relationship Management in a Retail Chain: An Exploratory Study, 6 QUAL. MKT. RES. 248, 249 (2003).
    • (2003) QUAL. MKT. RES. , vol.6 , pp. 248
    • Wong, A.1    Sohal, A.2
  • 73
    • 85082093891 scopus 로고    scopus 로고
    • See sources cited supra note 66
    • See sources cited supra note 66.
  • 74
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    • Using Return Policies to Elicit Retailer Information
    • See Sciarrotta, supra note 65, at 33 (recounting how on DVDs sold at liquidators, Philips was recovering only 20 to 30 cents per dollar of factory costs). My focus here is on retailer-return policies, but those policies are of course directly affected by manufacturer-return policies. There is a quite substantial theoretical literature demonstrating how, by accepting retailer returns, a manufacturer lowers retailer risk and can induce retailers to more truthfully reveal information about the actual strength of consumer product demand. See, e. g.
    • See Sciarrotta, supra note 65, at 33 (recounting how on DVDs sold at liquidators, Philips was recovering only 20 to 30 cents per dollar of factory costs). My focus here is on retailer-return policies, but those policies are of course directly affected by manufacturer-return policies. There is a quite substantial theoretical literature demonstrating how, by accepting retailer returns, a manufacturer lowers retailer risk and can induce retailers to more truthfully reveal information about the actual strength of consumer product demand. See, e. g., Anil Arya & Brian Mittendorf, Using Return Policies to Elicit Retailer Information, 35 RAND J. EcoN. 617 (2004).
    • (2004) RAND J. Econ. , vol.35 , Issue.3
    • Arya, A.1    Mittendorf, B.2
  • 75
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    • Sciarrotta, supra note 65, at 36
    • Sciarrotta, supra note 65, at 36.
  • 76
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    • Id. at 37
    • Id. at 37.
  • 77
    • 85082093275 scopus 로고    scopus 로고
    • The Return Exchange, http://www.returnexchange.com (last visited Nov. 20, 2005)
    • The Return Exchange, http://www.returnexchange.com (last visited Nov. 20, 2005).
  • 78
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    • Schuman, supra note 69
    • Schuman, supra note 69.
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    • Chandler, supra note 69
    • Chandler, supra note 69.
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    • Schuman, supra note 69
    • Schuman, supra note 69.
  • 81
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    • Privacy Rights Clearinghouse, Alert: The Return Exchange-Have You Been Denied the Ability to Make Returns or Exchanges with Large Retailers? We Want to Know (Nov. 1 7, 2004)
    • Privacy Rights Clearinghouse, Alert: The Return Exchange-Have You Been Denied the Ability to Make Returns or Exchanges with Large Retailers? We Want to Know (Nov. 1 7, 2004), http://www.privacyrights.org/ar/RetumExchange.htm.
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    • Let's Make a Deal: A Buyer's Market Has Shoppers Demanding and Getting Discounts
    • Jeffrey A. Trachtenberg, Let's Make a Deal: A Buyer's Market Has Shoppers Demanding and Getting Discounts, WALL ST. J., Feb. 8, 1991, at Al.
    • (1991) WALL ST. J.
    • Trachtenberg, J.A.1
  • 83
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    • Haggling for Hot Dogs (And Other Real-Life Adventures in the Neglected Art of Negotiation)
    • Feb
    • Tom Chiarella, Haggling for Hot Dogs (and Other Real-Life Adventures in the Neglected Art of Negotiation), ESQUIRE, Feb. 2005, at 115.
    • (2005) ESQUIRE , pp. 115
    • Chiarella, T.1
  • 84
    • 33645321640 scopus 로고    scopus 로고
    • One-Sided Contracts in Competitive Consumer Markets
    • There is an interesting contrast between the pattern that I explain in this section---0ne where firms intentionally adopt relatively clear, bright-line standard-form terms which they intend to bargain around-and the pattern that Bernstein found in the cotton industry, where cotton merchants and traders work out their problems cooperatively subject to bright-line industry trade rules. Bernstein, supra note 1, at 1732-35, 1776-8 1. Unlike Bernstein's cotton-industry norms, which are driven by the desire of industry participants to develop and maintain good reputations for efficiently performing and resolving disputes, the incentive for firms to negotiate around bright-line terms is driven by the desire to attract some kinds of consumers and to avoid others, a more precise screening function than is apparent in Bernstein's study of the cotton industry. There are some similarities between my analysis and that presented by Bebchuk and Posner in this volume, and I note these at various points below
    • There is an interesting contrast between the pattern that I explain in this section---0ne where firms intentionally adopt relatively clear, bright-line standard-form terms which they intend to bargain around-and the pattern that Bernstein found in the cotton industry, where cotton merchants and traders work out their problems cooperatively subject to bright-line industry trade rules. Bernstein, supra note 1, at 1732-35, 1776-8 1. Unlike Bernstein's cotton-industry norms, which are driven by the desire of industry participants to develop and maintain good reputations for efficiently performing and resolving disputes, the incentive for firms to negotiate around bright-line terms is driven by the desire to attract some kinds of consumers and to avoid others, a more precise screening function than is apparent in Bernstein's study of the cotton industry. There are some similarities between my analysis and that presented by Bebchuk and Posner in this volume, and I note these at various points below. Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts in Competitive Consumer Markets, 104 MICH. L. REV 827 (2006).
    • (2006) MICH. L. REV , vol.104 , pp. 827
    • Bebchuk, L.A.1    Posner, R.A.2
  • 85
    • 33645288544 scopus 로고    scopus 로고
    • The Hidden Roles of Boilerplate in Standard-Fann Contracts
    • Gilo and Porat believe, as do Bebchuk and Posner and I, that standard-form contracts are important instruments for firms to screen or select different consumer types, but they believe, contrary in my view to the existing evidence, that standard-form terms themselves confer precise benefits on consumers who have the sophistication to read them, so that standard-form terms are themselves used to screen consumers, In my model, precisely the opposite i s true: standard-form terms offer little, and firms then allow their employees to exercise discretion in identifying those consumers with respect to whom it is profitable to go beyond standard-form obligations
    • Gilo and Porat believe, as do Bebchuk and Posner and I, that standard-form contracts are important instruments for firms to screen or select different consumer types, but they believe, contrary in my view to the existing evidence, that standard-form terms themselves confer precise benefits on consumers who have the sophistication to read them, so that standard-form terms are themselves used to screen consumers. David Gilo & Ariel Porat, The Hidden Roles of Boilerplate in Standard-Fann Contracts, 104 MICH. L. REv. 983 (2006). In my model, precisely the opposite i s true: standard-form terms offer little, and firms then allow their employees to exercise discretion in identifying those consumers with respect to whom it is profitable to go beyond standard-form obligations.
    • (2006) MICH. L. Rev. , vol.104 , pp. 983
    • Gilo, D.1    Porat, A.2
  • 86
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    • The Detenninants of Consumer Complaints
    • For empirical evidence that it i s indeed those firms with large fixed capital and hence a large stake i n building enduring customer relationships who are most interested in minimizing and responding cooperatively to customer complaints
    • For empirical evidence that it i s indeed those firms with large fixed capital and hence a large stake i n building enduring customer relationships who are most interested in minimizing and responding cooperatively to customer complaints, see Sharon Oster, The Detenninants of Consumer Complaints, 62 REV. EcoN. & STAT. 603 (1980).
    • (1980) REV. Econ. & STAT. , vol.62 , pp. 603
    • Oster, S.1
  • 87
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    • Customer Service: The Key to Collection Success
    • Ken Maynard, Customer Service: The Key to Collection Success, CREDIT MGMT., Oct. 2003, at 44.
    • (2003) CREDIT MGMT. , pp. 44
    • Maynard, K.1
  • 88
    • 85082096924 scopus 로고    scopus 로고
    • This result is demonstrated in the appendix. See infra App
    • This result is demonstrated in the appendix. See infra App.
  • 89
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    • Credit Rationing in Markets with Imperfect Information
    • This important general result is due to
    • This important general result is due to Joseph Stiglitz & Andrew Weiss, Credit Rationing in Markets with Imperfect Information, 71 AM. EcoN. REV. 393 (1981).
    • (1981) AM. Econ. REV. , vol.71 , pp. 393
    • Stiglitz, J.1    Weiss, A.2
  • 90
    • 85082093681 scopus 로고    scopus 로고
    • Note that even if firms are able to quite accurately assess consumer type at the negotiation stage, it may be that courts are unable to verify consumer type. This problem-types are privately observable but not verifiable to third party enforcers-is a standard law-and-economics explanation for contractual incompleteness. I discuss in some detail below the limits to judicial verification of both consumer and firm opportunism, but my basic approach is to presume that consumer opportunism is not verifiable and so firms have to solve it on their own
    • Note that even if firms are able to quite accurately assess consumer type at the negotiation stage, it may be that courts are unable to verify consumer type. This problem-types are privately observable but not verifiable to third party enforcers-is a standard law-and-economics explanation for contractual incompleteness. I discuss in some detail below the limits to judicial verification of both consumer and firm opportunism, but my basic approach is to presume that consumer opportunism is not verifiable and so firms have to solve it on their own.
  • 92
    • 85082095470 scopus 로고    scopus 로고
    • See supra notes 4-8 and accompanying text
    • See supra notes 4-8 and accompanying text.
  • 93
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    • See supra Pan II.A
    • See supra Pan II.A.
  • 94
    • 85082094633 scopus 로고    scopus 로고
    • See supra Part Il.B
    • See supra Part Il.B.
  • 95
    • 85082099085 scopus 로고    scopus 로고
    • Letter on behalf of the Financial Services Roundtable, supra note 44, at 2
    • Letter on behalf of the Financial Services Roundtable, supra note 44, at 2.
  • 96
    • 85082095243 scopus 로고    scopus 로고
    • To see this, suppose that it costs the firm an amount c to provide the basic good or service, but an extra amount/to provide frills demanded by a high-value type, and let the probability of a low-value consumer be q, while the probability of high-value-consumer type is then (I-q). Under a strategy of granting frills only when the consumer reveals herself to be a high-value type, the firm's expected costs, which will equal price, p, under competition, are given by qc + (I-q)(c + f) = c + (I-q)f = p. Hence the price p both above the cost c of servicing low-value consumers and below the cost (c + f) of servicing high-value consumers
    • To see this, suppose that it costs the firm an amount c to provide the basic good or service, but an extra amount/to provide frills demanded by a high-value type, and let the probability of a low-value consumer be q, while the probability of high-value-consumer type is then (I-q). Under a strategy of granting frills only when the consumer reveals herself to be a high-value type, the firm's expected costs, which will equal price, p, under competition, are given by qc + (I-q)(c + f) = c + (I-q)f = p. Hence the price p both above the cost c of servicing low-value consumers and below the cost (c + f) of servicing high-value consumers.
  • 97
    • 85082094456 scopus 로고    scopus 로고
    • That is, using the notation set out above, supra note 96, a competitive contract of this form sets p = c
    • That is, using the notation set out above, supra note 96, a competitive contract of this form sets p = c.
  • 98
    • 85082094560 scopus 로고    scopus 로고
    • Free Fist Class Upgrade-Fantasy or Fact?
    • Free Fist Class Upgrade-Fantasy or Fact?, TRAVEL INSIDER, Feb. 19, 2005, http://www.thetravelinsider.info/2003/0228.htm.
    • (2005) TRAVEL INSIDER
  • 99
    • 85082095968 scopus 로고    scopus 로고
    • Id. (emphasis added). The article continues, "Almost without exception, i f an airline is going to give away empty first class seats, they will start off with their 'best' frequent fliers and/or the people that paid the highest fares." Id. Observe that just as providers have an interest in lowering the transaction costs of discretionary forgiveness, so too do they have an interest in finding algorithms and rules of thumb that effectively and cheaply discriminate among customers in granting discretionary benefits. As the legacy carriers' practices illustrate, as computational speed and capacity have increased, the algorithms available to firms for such ex-post screening use increasingly detailed and accurate customer-specific information. As a consequence, firms can rely on information about customer value that they have directly collected and need rely less on customer complaints as a signal of customer type
    • Id. (emphasis added). The article continues, "Almost without exception, i f an airline is going to give away empty first class seats, they will start off with their 'best' frequent fliers and/or the people that paid the highest fares." Id. Observe that just as providers have an interest in lowering the transaction costs of discretionary forgiveness, so too do they have an interest in finding algorithms and rules of thumb that effectively and cheaply discriminate among customers in granting discretionary benefits. As the legacy carriers' practices illustrate, as computational speed and capacity have increased, the algorithms available to firms for such ex-post screening use increasingly detailed and accurate customer-specific information. As a consequence, firms can rely on information about customer value that they have directly collected and need rely less on customer complaints as a signal of customer type.
  • 100
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    • Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets
    • Discretionary benefits are in this important sense quite di fferent than the case of shrouded costs considered by Gabaix and Laibson. See
    • Discretionary benefits are in this important sense quite di fferent than the case of shrouded costs considered by Gabaix and Laibson. See Xavier Gabaix & David Laibson, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q.J. EcoN. (forthcoming Aug. 2006), available at http://econ-www.mit.edu/faculty/download_pdf.php?id=527.
    • (2006) Q.J. Econ. , vol.121
    • Gabaix, X.1    Laibson, D.2
  • 101
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    • This insight is the basis for the analysis i n Bebchuck & Posner, supra note 85, at 87-28
    • This insight is the basis for the analysis i n Bebchuck & Posner, supra note 85, at 87-28.
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    • Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships
    • This i s similar to the point made by, (arguing that if poor consumers attach low value both to a product and to a generous term such as a warranty, then they may be made worse off when the law mandates such a term, because high-value consumers drive up the price of the good by a large amount when the warranty is man-dated)
    • This i s similar to the point made by Richard Craswell, Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships, 43 STAN. L. REV. 361, 377-80 (1991) (arguing that if poor consumers attach low value both to a product and to a generous term such as a warranty, then they may be made worse off when the law mandates such a term, because high-value consumers drive up the price of the good by a large amount when the warranty is man-dated).
    • (1991) STAN. L. REV. , vol.43 , Issue.361 , pp. 377-380
    • Craswell, R.1
  • 103
    • 85082093942 scopus 로고    scopus 로고
    • See Bebchuck & Posner, supra note 85, at 829-30 (presuming that when firms are sensitive to their market reputations, the problem for contract design is in control ling consumer, not firm, opportunism)
    • See Bebchuck & Posner, supra note 85, at 829-30 (presuming that when firms are sensitive to their market reputations, the problem for contract design is in control ling consumer, not firm, opportunism).
  • 104
    • 1542488210 scopus 로고
    • Opting in and Opting out: Bargaining for Fiduciary Duties in Cooperative Ventures
    • The importance of two-sided opportunism and opportunistic, bad-faith lawsuits cannot be overestimated. For an analytical treatment of two-sided opportunism and a discussion of how the possibility of bad-faith, opportunistic lawsuits figures in neoclassical economic analysis of the proper scope of legal rules protecting against contractual opportunism, 301-08
    • The importance of two-sided opportunism and opportunistic, bad-faith lawsuits cannot be overestimated. For an analytical treatment of two-sided opportunism and a discussion of how the possibility of bad-faith, opportunistic lawsuits figures in neoclassical economic analysis of the proper scope of legal rules protecting against contractual opportunism, see Jason Scott Johnston, Opting in and Opting out: Bargaining for Fiduciary Duties in Cooperative Ventures, 70 WASH. U. L.Q. 291, 301-08 (1992).
    • (1992) WASH. U. L.Q. , vol.70 , pp. 291
    • Johnston, J.S.1
  • 105
    • 85082096684 scopus 로고    scopus 로고
    • Calling the situation on this particular issue a "split" may be going too far, as even the strongest judicial statement in favor of holding that a merger clause bars evidence of fraud, UAW­ GM Human Res. Ctr. v. KSL Recreation Corp., 579 N.W.2d 41 1 (Mich. Ct. App. 1998), has already been subject to the limiting interpretation that it is inapplicable to frauds that allegedly nullify assent to an entire contract, as opposed to assent to a particular term. See Star Ins. Co. v. United Commercial Ins. Agency, 392 F. Supp. 2d 927, 928-29 (E.D. Mich. 2005)
    • Calling the situation on this particular issue a "split" may be going too far, as even the strongest judicial statement in favor of holding that a merger clause bars evidence of fraud, UAW­ GM Human Res. Ctr. v. KSL Recreation Corp., 579 N.W.2d 41 1 (Mich. Ct. App. 1998), has already been subject to the limiting interpretation that it is inapplicable to frauds that allegedly nullify assent to an entire contract, as opposed to assent to a particular term. See Star Ins. Co. v. United Commercial Ins. Agency, 392 F. Supp. 2d 927, 928-29 (E.D. Mich. 2005).
  • 106
    • 85082098934 scopus 로고    scopus 로고
    • Compare Van Der Stok v. Van Voorhees, 866 A.2d 972, 975-76 (N.H. 2005), and Snyder v. Lovercheck, 992 P.2d 1079, 1084-85 (Wyo. 1 999), with Danann Realty Corp. v. Harris, 157 N. E. 2d 597, 599 (N. Y. 1959)
    • Compare Van Der Stok v. Van Voorhees, 866 A.2d 972, 975-76 (N.H. 2005), and Snyder v. Lovercheck, 992 P.2d 1079, 1084-85 (Wyo. 1 999), with Danann Realty Corp. v. Harris, 157 N. E. 2d 597, 599 (N. Y. 1959).
  • 107
    • 85082092697 scopus 로고    scopus 로고
    • It is tautologically true that oral promises modifying a standard-form contract are made after oral promises or representations that are made before the individual has actually entered into the contract. It is true that the evidence I discuss above pertains almost entirely to post-contractual renegotiation by such agents. However, on my analysis, what is crucial is that firms screen customers by giving their agents the discretion to be more generous than the standard-form and that there is indeed evidence that this discretion is exercised. To the extent that the cases on, in particular, oral express warranties expanding upon the limiting language of a standard-form show that agents are making promises before the contract is even entered into, the cases themselves provide even more evidence of the kind of bargaining I discuss, including evidence suggesting that the bargaining to vary the terms of the standard-form may often occur much earlier, at the contract formation stage
    • It is tautologically true that oral promises modifying a standard-form contract are made after oral promises or representations that are made before the individual has actually entered into the contract. It is true that the evidence I discuss above pertains almost entirely to post-contractual renegotiation by such agents. However, on my analysis, what is crucial is that firms screen customers by giving their agents the discretion to be more generous than the standard-form and that there is indeed evidence that this discretion is exercised. To the extent that the cases on, in particular, oral express warranties expanding upon the limiting language of a standard-form show that agents are making promises before the contract is even entered into, the cases themselves provide even more evidence of the kind of bargaining I discuss, including evidence suggesting that the bargaining to vary the terms of the standard-form may often occur much earlier, at the contract formation stage.
  • 108
    • 25144443209 scopus 로고    scopus 로고
    • Should contractual clauses that forbid renegotiation always be enforced?
    • See Towers Charter & Marine Corp. v. Cadillac Ins. Co., 894 F.2d 5 1 6, 522 (2d Cir. 1 990) (citing Rose v. Spa Realty Assocs., 366 N.E.2d 1 279, 1 283 (N.Y. 1977)); see also Wis. Knife Works v. Nat'! Metal Crafters, 781 F.2d 1280 (7th Cir. 1986) (interpreting oral promises modifying written contracts which by their terms prohibit oral modifications as enforceable under U.C.C. § 2-209 as waivers when there is proof of reliance). It is perhaps worth noting that standard economic theory of contract renegotiation cannot explain why courts would ever enforce a modification when the contract itself prohibited modifications. However, just as I have constructed an adverse selection-based explanation for enforcing such modifications, so too has, shown that certain kinds of contractual moral hazards can also justify enforcing such modifications
    • See Towers Charter & Marine Corp. v. Cadillac Ins. Co., 894 F.2d 5 1 6, 522 (2d Cir. 1 990) (citing Rose v. Spa Realty Assocs., 366 N.E.2d 1 279, 1 283 (N.Y. 1977)); see also Wis. Knife Works v. Nat'! Metal Crafters, 781 F.2d 1280 (7th Cir. 1986) (interpreting oral promises modifying written contracts which by their terms prohibit oral modifications as enforceable under U.C.C. § 2-209 as waivers when there is proof of reliance). It is perhaps worth noting that standard economic theory of contract renegotiation cannot explain why courts would ever enforce a modification when the contract itself prohibited modifications. However, just as I have constructed an adverse selection-based explanation for enforcing such modifications, so too has Schmitz, P.W. Should contractual clauses that forbid renegotiation always be enforced?, Journal of Law, Economics, and Organization, Volume 21, Issue 2, October 2005, Pages 315-329 DOI: 10.1093/jleo/ewi019 shown that certain kinds of contractual moral hazards can also justify enforcing such modifications.
    • (2005) Journal of Law, Economics, and Organization , vol.21 , Issue.2 , pp. 315-329
    • Schmitz, P.W.1
  • 109
    • 85082096528 scopus 로고    scopus 로고
    • U.C.C. § 2-316(a) (1998)
    • U.C.C. § 2-316(a) (1998).
  • 110
    • 85082094532 scopus 로고    scopus 로고
    • As comment 1 to U.C. C. § 2-3 1 6 explains, "[t]his section is designed principally to deal with those frequent clauses in sales contracts which seek to exclude 'all warranties, express or implied.' It seeks to protect a buyer from unexpected and unbargained language of disclaimer by denying effect to such language when inconsistent with language of express warranty…." U.C.C. § 2-3 1 6 cmt. I (1998)
    • As comment 1 to U.C. C. § 2-3 1 6 explains, "[t]his section is designed principally to deal with those frequent clauses in sales contracts which seek to exclude 'all warranties, express or implied.' It seeks to protect a buyer from unexpected and unbargained language of disclaimer by denying effect to such language when inconsistent with language of express warranty…." U.C.C. § 2-3 1 6 cmt. I (1998).
  • 111
    • 85082095133 scopus 로고    scopus 로고
    • U.C.C. § 2-3 1 6 cmt. 2 (1998)
    • U.C.C. § 2-3 1 6 cmt. 2 (1998).
  • 112
    • 85082098879 scopus 로고    scopus 로고
    • U.C.C. § 2-202(a) (1998)
    • U.C.C. § 2-202(a) (1998).
  • 113
    • 85082096323 scopus 로고    scopus 로고
    • U.C.C. § 2-3 1 3 cmt. 5 (1998)
    • U.C.C. § 2-3 1 3 cmt. 5 (1998).
  • 114
    • 85082097459 scopus 로고
    • The Consumer and the Paro[ Evidence Rule: Section 2-202 of the Unifonn Commercial Code
    • Richard F. Broude, The Consumer and the Paro[ Evidence Rule: Section 2-202 of the Unifonn Commercial Code, 1970 DUKE L.J. 881, 917;
    • (1970) DUKE L.J. , vol.881 , pp. 917
    • Broude, R.F.1
  • 115
    • 85082098827 scopus 로고    scopus 로고
    • JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 12-4 (4th ed. 1995)
    • JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 12-4 (4th ed. 1995).
  • 116
    • 85082097098 scopus 로고    scopus 로고
    • The discussion here is drawn from the opinion i n Tillquist v. Ford Motor Credit Co., 71 4 F. Supp. 607, 6 1 1-1 2 (D. Conn. 1 989)
    • The discussion here is drawn from the opinion i n Tillquist v. Ford Motor Credit Co., 71 4 F. Supp. 607, 6 1 1-1 2 (D. Conn. 1 989).
  • 117
    • 85082097654 scopus 로고    scopus 로고
    • See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U. S. 585, 593-94 (1991)
    • See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U. S. 585, 593-94 (1991).
  • 118
    • 85082095954 scopus 로고    scopus 로고
    • See, e. g., Green Tree Fin. Corp. v. Bazzle, 539 U. S. 444, 448 (2003); Green Tree Fin. Corp.-Ala. v. Randolph, 53 1 U. S. 79, 82-83 (2000); Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 23 (1991)
    • See, e. g., Green Tree Fin. Corp. v. Bazzle, 539 U. S. 444, 448 (2003); Green Tree Fin. Corp.-Ala. v. Randolph, 53 1 U. S. 79, 82-83 (2000); Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 23 (1991).
  • 119
    • 85082095875 scopus 로고    scopus 로고
    • 500 U.S. 20 (1991)
    • U.S. 20 (1991).
  • 120
    • 33646064667 scopus 로고    scopus 로고
    • Mandatory Arbitration: Privatizing Public Rights, Compelling the Unwilling To Arbitrate
    • 686-88, (footnotes omitted)
    • Clyde W. Summers, Mandatory Arbitration: Privatizing Public Rights, Compelling the Unwilling To Arbitrate, 6 U. PA. J. LAB. & EMP. L. 685, 686-88 (2004) (footnotes omitted).
    • (2004) U. PA. J. LAB. & EMP. L. , vol.6 , pp. 685
    • Summers, C.W.1
  • 121
    • 85082094583 scopus 로고    scopus 로고
    • See, e.g., Hooters of Am., Inc. v. Phillips, 39 F. Supp. 2d 582, 61 4 (D.S.C. 1 998) (holding arbitration clause unconscionable where employer had total control over arbitrators); Knepp v. Credit Acceptance Corp., 229 B. R. 82 1, 837-38 (Bankr. N.D. Ala. 1 999) (finding unconscionable an arbitration clause in which debtor would be required to pay the costs of arbitration); Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1 98 1) (holding arbitration clause substantively unconscionable where nonunion members forced to arbitrate before union arbitration panel); Abramson v. Juniper Networks, 9 Cal. Rptr. 3d 422, 658-60 (Ct. App. 2004) (holding that an express provision requiring an employee to pay half the costs of arbitration was unconscionable)
    • See, e.g., Hooters of Am., Inc. v. Phillips, 39 F. Supp. 2d 582, 61 4 (D.S.C. 1 998) (holding arbitration clause unconscionable where employer had total control over arbitrators); Knepp v. Credit Acceptance Corp., 229 B. R. 82 1, 837-38 (Bankr. N.D. Ala. 1 999) (finding unconscionable an arbitration clause in which debtor would be required to pay the costs of arbitration); Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1 98 1) (holding arbitration clause substantively unconscionable where nonunion members forced to arbitrate before union arbitration panel); Abramson v. Juniper Networks, 9 Cal. Rptr. 3d 422, 658-60 (Ct. App. 2004) (holding that an express provision requiring an employee to pay half the costs of arbitration was unconscionable).
  • 122
    • 0346919356 scopus 로고    scopus 로고
    • Consumer Arbitration as Exceptional Consumer Law (With a Contractualist Reply to Carrington & Haagen)
    • For this important point, I am indebted to
    • For this important point, I am indebted to Stephen J. Ware, Consumer Arbitration as Exceptional Consumer Law (With a Contractualist Reply to Carrington & Haagen), 29 MCGEORGE L. REV. 195 (1998).
    • (1998) MCGEORGE L. REV. , vol.29 , pp. 195
    • Ware, S.J.1
  • 123
    • 85082093702 scopus 로고    scopus 로고
    • See U.C.C. § 2-7 19(3) (1 998) ("Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable"). The only way to avoid such liability contractually is to warn the consumer against product risks, but such warnings do not apply to the risks caused by defective products, and the warnings themselves may be found inadequate, which makes even a non-defective product defective (for failure to include an adequate warning)
    • See U.C.C. § 2-7 19(3) (1 998) ("Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable"). The only way to avoid such liability contractually is to warn the consumer against product risks, but such warnings do not apply to the risks caused by defective products, and the warnings themselves may be found inadequate, which makes even a non-defective product defective (for failure to include an adequate warning).
  • 124
    • 85082098228 scopus 로고    scopus 로고
    • This is true notwithstanding the availability of the class action, since for small and medium sized claims, class actions will not be economically attractive to plaintiffs' attorneys unless there are a very large number of such claims that may be aggregated. It is true that in cases where the individual claim is small but there are a large number of claimants, the class action may be economically viable when individual arbitration is not
    • This is true notwithstanding the availability of the class action, since for small and medium sized claims, class actions will not be economically attractive to plaintiffs' attorneys unless there are a very large number of such claims that may be aggregated. It is true that in cases where the individual claim is small but there are a large number of claimants, the class action may be economically viable when individual arbitration is not.
  • 125
    • 85082093282 scopus 로고    scopus 로고
    • A similar point, but in a rather different context, is made by Bernstein, supra note I, at 1743, 1776
    • A similar point, but in a rather different context, is made by Bernstein, supra note I, at 1743, 1776.
  • 126
    • 33646068704 scopus 로고    scopus 로고
    • Employment Arbitration and Workplace Justice
    • 108-17
    • Lewis L. Maltby, Employment Arbitration and Workplace Justice, 38 U.S.F. L. REV. 105, 108-17 (2003).
    • (2003) U.S.F. L. REV. , vol.38 , pp. 105
    • Maltby, L.L.1


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