The behavioral economics of consumer contracts

Minnesota Law Review

Volumn 92, Issue 3, 2008, Pages 749-802

  Bar Gill, Oren ^a  

^a NEW YORK UNIVERSITY   (United States)

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EID: 41449095211     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (354)

1. Richard A. Epstein, Behavioral Economics: Human Errors and Market Corrections, 73 U. CHI. L. REV. 111, 111 (2006)
2. [hereinafter Epstein, Behavioral Economics].
3. See Oren Bar-Gill, Bundling and Consumer Misperception, 73 U. CHI. L. REV. 33 (2006)
4. [hereinafter Bar-Gill, Bundling and Consumer Misperception];
5. Oren Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373 (2004)
6. [hereinafter Bar-Gill, Seduction by Plastic].
7. Epstein, Behavioral Economics, supra note 1, at 123-32;
8. see also Richard A. Epstein, Second-Order Rationality, in BEHAVIORAL PUBLIC FINANCE 355-56, 365-67, 384-85 (Edward J. McCaffery & Joel Slemrod eds., 2006)
9. [hereinafter Epstein, Second-Order Rationality], Some of the challenges and responses discussed below echo elements of the general debate over the role of behavioral economics in legal policymaking.
10. See, e.g., Christine Jolis, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1476-88 (1998)
11. [hereinafter Jolls et al., Behavioral Approach];
12. Christine Jolis, Cass R. Sunstein & Richard Thaler, Theories and Tropes: A Reply to Posner and Kelman, 50 STAN. L. REV. 1593 (1998);
13. Mark G. Kelman, Behavioral Economics as Part of a Rhetorical Duet: A Response to Jolis, Sunstein, and Thaler, 50 STAN. L. REV. 1577, 1586-90 (1998);
14. Richard A. Posner, Rational Choice, Behavioral Economics, and the Law, 50 STAN. L. REV. 1551 (1998). This Article, and more broadly, this Exchange - between Professor Epstein and myself-is unique in its focus on the application of behavioral law and economics to consumer contracts.
15. See Epstein, Behavioral Economics, supra note 1, at 114-18, 126-27;
16. Richard A. Epstein, Exchange, The Neoclassical Economics of Consumer Contracts, 92 MINN. L. REV. 803, 810-16 (2008)
17. [hereinafter Epstein, Exchange, Neoclassical Economics].
18. See Epstein, Behavioral Economics, supra note 1, at 120;
19. Epstein, Exchange, Neoclassical Economics, supra note 4, at 816-17.
20. See Epstein, Behavioral Economics, supra note 1, at 119-20.
21. Id. at 120.
22. Id. at 121-22.
23. See id. ("[B]uyers do not have uniform demands.").
24. A qualification should be mentioned: If sellers can segment the market and offer one product (and one pricing scheme) to overestimators and another product (and another pricing scheme) to underestimators, then a design response to consumer misperception need not be inconsistent with an average mistake of zero. This qualification, however, is largely theoretical. As Epstein himself argues, segmentation according to the type or level of misperception is unlikely. See id. at 121 ("[N]o consumer wears a black or white hat that indicates his or her class [i.e., bias type or bias level].");
25. see also infra note 78.
26. See Epstein, Behavioral Economics, supra note 1, at 124-25.
27. Id. at 125, 128.
28. Id. at 127 ("Banks know how to live with predictable defaults, but they hardly regard the failure of their borrowers as an advantage to themselves.").
29. See id. at 125, 128 (noting that the Truth in Lending Act (TILA) requires credit card company disclosures and concluding, "I am hard pressed to think of any form of direct regulation beyond TILA that could do any good").
30. See id. at 131 ("Banning [so-called 'teaser' credit card] rates will do no good, and it could easily work some anticompetitive harm, by making it more difficult for new banks to pry customers away from established competitors.").
31. See id. at 129 (describing the difficulty in crafting regulations that will satisfy the needs of differing credit card customers).
32. See id. ("[A]ny regulation that slows down the profligate borrower will also deter the cautious borrower from entering into the market by raising his costs of transaction.").
33. See id. at 128.
34. See id. at 125-26 (discussing the disclosure role of TILA).
35. See id. at 127 ("The general disclosure remedies are shown to have a place.").
36. I define "use" broadly to include the payment of different price components, redeeming rebates, etc.
37. This theme is further developed in a companion piece. See Oren Bar-Gill, Informing Consumers About Themselves 53-63 (Oct. 4, 2007) (unpublished manuscript, on file with author)
38. [hereinafter Bar-Gill, Informing Consumers].
39. Epstein, Behavioral Economics, supra note 1, at 111.
40. Id. at 118.
41. See id. at 120.
42. See id. (arguing that the competitive, open market corrects consumer misperceptions because a "seller of a somewhat different product will draw away the customers [of the original, misperceived product] by trumpeting the mistake").
43. See Amos Tversky & Daniel Kahneman, Rational Choice and the Framing of Decisions, 59 J. BUS. (CONFERENCE PROCEEDINGS) S251, S275 (1986),
44. reprinted in RATIONAL CHOICE: THE CONTRAST BETWEEN ECONOMICS AND PSYCHOLOGY 67, 91 (Robin M. Hogarth & Melvin W. Reder eds., 1987) ("The claim that the market can be trusted to correct the effect of individual irrationalities cannot be made without supporting evidence . . . .").
45. Epstein, Behavioral Economics, supra note 1, at 120.
46. In this Exchange, Epstein cites findings from a recent study by Agarwal et al. showing that consumers do learn. See Epstein, Exchange, Neoclassical Economics, supra note 4, at 811-12
47. (citing Sumit Agarwal et al., The Age of Reason: Financial Decisions over the Lifecycle 2 (Mass. Inst, of Tech. Dep't of Econ. Working Paper Series, Working Paper No. 07-11, 2007), available at http://ssrn.com/ abstract=973790).
48. I am not arguing that consumers do not learn. I am only arguing that learning is imperfect. Indeed, the Agarwal study reveals that a significant number of consumers make mistakes. See, e.g., Agarwal et al., supra, at 15 (concluding that, in home equity credit lending, "[t]he unconditional average probability of making a ... mistake [affecting interest rate] is 24[%] for loans and 18[%] for lines [of credit]" and "[y]ounger and older consumers have a greater tendency to misestimate the value of their house . . . which leads them to borrow at an increased APR").
49. On the conditions for effective learning and on the limits of learning, see Howard Latin, "Good" Warnings, Bad Products, and Cognitive Limitations, 41 UCLA L. REV. 1193, 1252-53 (1994) ("[T]he capacity for learning is dependent on the specific product-use context . . . .");
50. Tversky & Kahneman, supra note 27, at S274-75 ("Effective learning takes place only under certain conditions . . . . [A]ny claim that a particular error will be eliminated by experience must be supported by demonstrating that the conditions for effective learning are satisfied.").
51. Cf. Latin, supra note 29, at 1253 ("[M]ost feedback [about the risks of using a product] takes the form of experiences of safe usage.").
52. See Tversky & Kahneman, supra note 27, at S274-75.
53. See Epstein, Behavioral Economics, supra note 1, at 120.
54. See id. (criticizing "the hopeless artificiality of any example that presupposes universal ignorance of the value of any standard commodity" and arguing that "there is no sustainable equilibrium when the mistake in information is about a standardized product that everyone can test and use").
55. On the limits of learning, even by sophisticated decision makers in "real world [situations] that involve high stakes and serious deliberation [,]" see Tversky & Kahneman, supra note 27, at S274.
56. See also Cade Massey & Richard H. Thaler, The Loser's Curse: Overconfidence vs. Market Efficiency in the National Football League Draft 3 (Mar. 15, 2006) (unpublished manuscript, available at http://ssrn.com/abstract- 697121) (documenting persistent bias in NFL draft picks and overestimation of the decision maker's abilities).
57. See Epstein, Behavioral Economics, supra note 1, at 120.
58. See id.
59. However, nonstandardized products may share standardized features, and interpersonal learning about these features can be effective. Cf. id. at 120-21 (arguing that consumers will likewise share information about valuation mistakes even in situations involving nonstandardized products).
60. For another discussion of this issue, see Oren Bar-Gill & Elizabeth Warren, Making Credit Safer 15 (Oct. 4, 2007) (unpublished manuscript, on file with the author).
61. Cf. Latin, supra note 29, at 1253 ("Product risks and accident scenarios are very diverse; feedback from one mode of use or product application consequently may not be very useful in minimizing other kinds of harms.").
62. For a similar discussion, see Bar-Gill & Warren, supra note 38, at 14.
63. Epstein, Exchange, Neoclassical Economics, supra note 4, at 813;
64. see also Epstein, Second-Order Rationality, supra note 3, at 361 ("[R]ational people take steps that on average reduce, not increase, the frequency and severity of their errors,").
65. Epstein, Exchange, Neoclassical Economics, supra note 4, at 813;
66. see also Epstein, Second-Order Rationality, supra note 3, at 361-62 ("[T]hey seek advice from friends, hire experts, attend classes, use MapQuest, and adopt rules of thumb or other tricks of the trade . . . ."),
67. Many small mistakes can be as harmful as a few large mistakes. Credit card borrowing provides an example. See TERESA A. SULLIVAN ET AL., AS WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 178 (1989);
68. Bar-Gill, Seduction by Plastic, supra note 2, at 1399 (describing how consumers make multiple small mistakes that equal a large mistake they would never make at once). Consumers make mistakes even when the decision is a big one. For example, many consumers take on subprime mortgage loans that they cannot repay.
69. See, e.g., James H. Carr & Lopa Kolluri, Predatory Lending: An Overview, in FANNIE MAE FOUNDATION, FINANCIAL SERVICES IN DISTRESSED COMMUNITIES: ISSUES AND ANSWERS 31, 37 (2001) (noting that individuals who would otherwise qualify for prime-rate loans nevertheless signed up for high-interest, subprime loans);
70. see also Lauren E. Willis, Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price, 65 MD. L. REV. 707, 731-32 (2006) (summarizing studies that show foreclosure rates ranging between 20% and 30%).
71. See Epstein, Behavioral Economics, supra note I, at 119-20 (arguing that in a situation in which misinformed consumers underestimate the value of a product, the market will cease unless at least one seller attempts to correct the misinformation).
72. Cf. Howard Beales et al., The Efficient Regulation of Consumer Information, 24 J.L. & ECON. 491, 527 (1981) (describing the lack of an incentive to disclose information if competitors will benefit as free-riders);
73. Epstein, Behavioral Economics, supra note 1, at 119-20 (noting the possibility that no seller will invest in correcting consumers' misperceptions if other sellers will subsequently benefit without expending any resources).
74. See Beales et al., supra note 45, at 527 (explaining why sellers might not disclose both positive and negative information);
75. see also R. Ted Cruz & Jeffrey J. Hinck, Not My Brother's Keeper: The Inability of an Informed Minority to Correct for Imperfect Information, 47 HASTINGS L.J. 635, 659 (1996) (detailing reasons why sellers lack incentive to inform consumers). In some markets, the advantage gained by moving first may be large enough to overcome this collective action problem.
76. For a general discussion of information failures in consumer markets, see Beales et al., supra note 45, at 503-09.
77. On the limits of advertising as a mistake-correction mechanism, see Xavier Gabaix & David Laibson, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q.J. ECON. 505, 507-10 (2006) (describing how truthful advertising to misinformed consumers does not always increase profitability);
78. Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203, 1242-43 (2003) (arguing that the costs of changing the way buyers shop will outweigh the small value that marketing is likely to achieve).
79. Epstein, Behavioral Economics, supra note 1, at 120. In his contribution to this Exchange, Epstein appears to retract his acknowledgment of the collective action problem.
80. See Epstein, Exchange, Neoclassical Economics, supra note 4, at 818-19. Using a five-seller example, he argues that "[i]f there is only a 50% chance that any one of these [sellers] will deviate from the cooperative mode [i.e., form the low quality equilibrium], then the odds are only 1 in 32 that the collusive equilibrium will stick."
81. Id. But the odds are not 50%. The collective action problem implies a zero probability of deviation, which, in turn, implies a 100% chance that the low quality equilibrium will stick. Of course, as described below, a sufficiently strong first-mover advantage, together with branding and product differentiation, can solve the collective action problem. The question - and this is an empirical one - is in what markets are these correcting forces sufficiently strong?
82. Epstein, Behavioral Economics, supra note 1, at 120.
83. Jeff Sovern, Toward a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 WM. & MARY L. REV. 1635, 1680-81 (2006) (noting reasons why sellers do not advertise terms that consumers would like to know);
84. see also Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: A Response to Market Manipulation, 6 ROGER WILLIAMS U. L. REV. 259, 336-37 (2000) (describing the possible effects of a manufacturer's effort to educate consumers on product safety, including a reduction in the overall demand for the product).
85. Epstein, Behavioral Economics, supra note 1, at 120.
86. See Edward L. Glaeser, Psychology and the Market, 94 AM. ECON. REV. (PAPERS & PROC.) 408, 409-11 (2004) ("Markets do not eliminate (and often exacerbate) irrationality . . . . The advertising industry is the most important economic example of these systematic attempts to mislead, where suppliers attempt to convince buyers that their products will yield remarkable benefits. . . . It is certainly not true that competition ensures that false beliefs will be dissipated. Indeed, in many cases competition will work to increase the supply of these falsehoods . . . .").
87. Glaeser argues, however, that government decision makers have weaker incentives than consumers to overcome errors, and thus intervention in markets might make things worse. See Edward L. Glaeser, Paternalism and Psychology, 73 U. CHI. L. REV. 133, 143-44 (2006).
88. The evidence summarized is drawn from the synthesis of existing studies that focus on borrowing behavior in Bar-Gill & Warren, supra note 38, at 19-33. In addition, experimental evidence suggests that credit cards affect spending behavior.
89. See Drazen Prelec & Duncan Simester, Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay, 12 MARKETING LETTERS 5, 11 (2001) (discussing evidence that the method of payment - credit card or cash - affects people's willingness to pay);
90. see also GEORGE RITZER, EXPRESSING AMERICA: A CRITIQUE OF THE GLOBAL CREDIT CARD SOCIETY 5-7, 13 (1995);
91. Richard A. Feinberg, Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation, 13 J. CONSUMER RES. 348, 354-55 (1986) ("[T]he presence of credit card stimuli enhances the magnitude of spending.");
92. Elizabeth C Hirschman, Differences in Consumer Purchase Behavior by Credit Card Payment System, 6 J. CONSUMER RES. 58, 64-65 (1979) ("[P]ossession of a bank card or store-issued card appears to be positively related to higher levels of in-store expenditures and to a greater incidence of in-store purchasing.");
93. Michael McCall & Heather J. Belmont, Credit Card Insignia and Restaurant Tipping: Evidence for an Associative Link, 81 J. APPLIED PSYCHOL. 609, 612-13 (1996) (showing evidence of increased tipping by consumers using credit cards instead of cash);
94. Dilip Soman, Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments, 27 J. CONSUMER RES. 460, 472-74 (2001) (showing that consumers paying by credit cards are more likely to make additional discretionary purchases).
95. See Haiyan Shui & Lawrence M. Ausubel, Time Inconsistency in the Credit Card Market 2-3 (May 3, 2004) (unpublished manuscript, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=586622).
96. Id. at 3.
97. The evidence shows that most consumers do not jump from one card to another and from one teaser rate to another. See Bar-Gill, Seduction by Plastic, supra note 2, at 1392;
98. see also infra Part III.B.1. But detailed statistics are not necessary to conclude that consumers do not jump from one teaser rate to another; it is evident from the fact that issuers offer teaser rates. Unless issuers have decided to forgo interest revenues altogether issuers would not offer teaser rates if most consumers did not stay beyond the introductory period. And it is clear that most issuers have not decided to forgo interest revenues altogether. In fact, in 2006 interest revenues represented 65% of issuers' total revenues.
99. Cf. CARD INDUSTRY DIRECTORY 11 (Sandra L. Budde ed., 19th ed. 2007) (listing interest revenues as $75.15 billion and issuers' total revenues as $114.99 billion).
100. Shui & Ausubel, supra note 53, at 3 n.4.
101. In the Shui & Ausubel study, the introductory rates were between 4.9% and 7.9%, while the post-introductory rate was 16%. Id. at 2, 7.
102. Id. at 8.
103. Id. at 2-3.
104. Id. at 8.
105. Id. at 7.
106. Note that all the credit cards had a post-introductory rate of 16%, though the point at which this rate began differed. Id.
107. Id. at 8. In his contribution to this Exchange, Epstein argues that "[i]t is no surprise that some individuals prefer a steeper discount for a shorter period to a higher one for a somewhat longer period. Thus if people know that they can accelerate their purchases - perhaps by timing the acquisition of a new card with large expenditures - then the purchase pattern makes sense."
108. Epstein, Exchange, Neoclassical Economics, supra note 4, at 824. But most consumers do not time the acquisition of a new card with large expenditures. Epstein's hypothesis is inconsistent with the data that most borrowing is done at the high post-introductory rates.
109. See Bar-Gill, Seduction by Plastic, supra note 2, at 1392;
110. see also Lawrence M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM. BANKR. L.J. 249, 263 (1997) ("[A] substantial portion of credit card borrowing still occurs at post-introductory interest rates . . . .").
111. See Shui & Ausubel, supra note 53, at 7.
112. Id.
113. See id. at 8-9 (finding that the average borrower can pay as much as $ 50 more a year by choosing the low teaser rate and continuing to borrow after the introductory period ends).
114. See David B. Gross & Nicholas S. Souleles, Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data, 117 Q.J. ECON. 149 (2002).
115. Id. at 180.
116. Id.
117. Id.
118. See Stephan Meier & Charles Sprenger, Impatience and Credit Behavior: Evidence from a Field Experiment (Fed. Reserve Bank of Boston, Working Paper No. 07-03, 2007), available at http://www.bos.frb.org/ economic/wp/wp2007/wp0703.pdf.
119. Id. at 5.
120. Id. at 3. The authors also find that high levels of impatience, represented by a low long-run discount factor, explain account delinquencies and slow debt repayment patterns.
121. Id. at 2-3.
122. Bar-Gill, Bundling and Consumer Misperception, supra note 2 (showing bundling as a response to consumer misperception);
123. Bar-Gill, Seduction by Plastic, supra note 2 (focusing on the credit card market).
124. See Epstein, Behavioral Economics, supra note 1, at 120-22;
125. see also infra note 74. A different critique, not mentioned by Epstein, argues that sellers will not respond to consumer mistakes as long as there are enough consumers that do not make these mistakes.
126. See Alan Schwartz & Louis L. Wilde, Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis, 127 U. PA. L. REV. 630, 638-39 (1979) (providing this "informed minority" argument for the first time in legal and economic literature). This argument does not apply when sellers can screen for sophisticated consumers. And, of course, it is not at all clear that there is a sufficiently large number of sophisticated, informed buyers in all markets.
127. See Sovern, supra note 49, at 1668-72 and sources cited therein.
128. See Epstein, Behavioral Economics, supra note 1, at 120-22. Epstein's critique focuses on my theory of misperception-based bundling.
129. Id. at 120-21 & n.28 ("[B]ecause 'sellers get the same total price under [different] pricing schemes,' they will rationally choose to give the tying product away for free and charge above the marginal cost for the tied product to offset losses."
130. (citing Bar-Gill, Bundling and Consumer Misperception, supra note 2, at 39)). But his criticism applies generally to any argument that sellers adjust the design of their products and prices in response to consumer misperception.
131. See Epstein, Behavioral Economics, supra note 1, at 121.
132. Epstein makes another argument that is specific to the bundling response that I study in Bar-Gill, Bundling and Consumer Misperception, supra note 2, at 34-35. In that paper I discuss the example of home printing and show that when consumers underestimate the amount of printing that they will do, sellers will bundle together printers and ink, give away printers for free, and set a high price for ink.
133. Id.
134. Epstein argues that this strategy is vulnerable to exploitation by savvy consumers. Epstein, Behavioral Economics, supra note 1, at 121. These savvy consumers will take two free printers from two different suppliers and play each supplier against the other, reducing the price of ink to its unit cost.
135. Id. First, it is not clear that there are enough savvy consumers to "break" the free printer/expensive ink equilibrium. Second, the savvy consumers will not affect the identified equilibrium, if sellers can screen for them. Third, Epstein's argument explains why printers are not free; it is not an argument that printers are priced at cost. The main goal of my analysis was to show that printers will be sold below cost while ink will be sold above cost.
136. Bar-Gill, Bundling and Consumer Misperception, supra note 2, at 34-35.
137. Epstein, Behavioral Economics, supra note 1, at 121.
138. See id. (stating that since some consumers are optimistic while others are pessimistic "it may well be that the best strategy is to ignore these biases altogether").
139. If market segmentation based on the level or type of misperception is possible, then sellers will design their products and pricing schemes in response to consumer misperception even when the average bias is zero. In particular, sellers will offer one product design to the overestimators and another product design to the underestimators. Epstein does not consider the segmentation option. Id. He implicitly dismisses it by arguing that "no consumer wears a black or white hat that indicates his or her class [i.e., bias type or bias level]."
140. Id. But even when the bias type is not directly observable it may be correlated with a trait that is observable, thus enabling market segmentation.
141. Id. at 130.
142. Id.
143. Id.
144. Id. at n.58 (citing evidence of fifteen- and thirty-year fixed-rate prime mortgage loans).
145. Id.
146. See Bar-Gill & Warren, supra note 38, at 29-30.
147. Epstein, Behavioral Economics, supra note 1, at 121.
148. This is not an easy task. Most design features that appear to respond to consumer misperception can also be rationalized using alternative theories which cannot be rejected in the abstract. Only a market-specific inquiry can determine the source of the identified product and price design. I conducted such an inquiry in the credit card market. See Bar-Gill, Seduction by Plastic, supra note 2.
149. The evidence suggests that rational choice theories cannot explain the observed pricing scheme in that market. I therefore concluded that the observed pricing scheme was designed in response to systematic consumer misperception. See id. at 1408-11.
150. The assumption, of course, is that the misperceived value is higher than the cost. Epstein analyzes an example of a one-dimensional product and a one-dimensional price and reaches the same conclusion. See Epstein, Behavioral Economics, supra note 1, at 120.
151. See Bar-Gill, Informing Consumers, supra note 22, at 2-3.
152. Id. at 13.
153. See Sovern, supra note 49, at 1638 ("[O]nly a handful of consumers obtain rebates . . . .").
154. See id. at 1639 ("Manufacturers apparently employ rebates chiefly because they increase sales by creating an illusion of a lower price, while the transaction costs generated by rebate offers permit manufacturers effectively to charge the unrebated price to most consumers.").
155. An alternative explanation for rebates, which does not rely on consumer misperception, views rebates as a mechanism for price discrimination. See Bar-Gill, Informing Consumers, supra note 22, at 40 (noting that rebates can be used to charge some customers more than others because, for instance, wealthier consumers may be less likely to turn in the rebate
156. (citing Yuxin Chen et al., Price Discrimination After the Purchase: Rebates as State-Dependent Discounts, 51 MGMT. SCI. 1131, 1131 (2005))). This alternative explanation is plausible in some markets and less plausible in others.
157. Late payment may impose an extra cost on the issuer, but this cost surely does not amount to $40 or more for a two-day delay in making a minimum payment of $40.
158. See infra Part II.C. As with rebates, there is an alternative, rational choice explanation for late fees: if consumers with higher default risk are more likely to pay late (before defaulting), then late fees provide a screening mechanism that can prevent a "lemons" problem. While theoretically valid, the practical explanatory power of this rational choice account is limited. First, it relies on the assumption that borrowers have superior information about their default risk. This assumption is questionable given issuers' sophisticated risk assessment methods.
159. See, e.g., DAVID S. EVANS & RICHARD SCHMALENSEE, PAYING WITH PLASTIC 105-07 (2d ed. 2005). Second, the rational choice/asymmetric information theory assumes that late payment provides valuable, new information to the uninformed issuers - again a questionable assumption.
160. See, e.g., RONALD J. MANN, CHARGING AHEAD 161-63 (2006) (stating that late fees are often incurred because of mistakes, but that these late payments provide no new information on the consumer's default risk). Finally, the data do not support this rational choice account. If issuers wish to screen for high risk borrowers, they have other means at their disposal.
161. For example, they can use default interest rates triggered by late payment. Indeed, since such default rates are commonly used, why are late fees needed? Specifically, why did late fees rise substantially after they were exempt from state-level regulation by the Supreme Court's Smiley v. Citibank decision in 1996? 517 U.S. 735 (1996) (finding that credit card fees could be defined as "interest" for regulatory purposes);
162. see also TAMARA DRAUT & JAVIER SILVA, BORROWING TO MAKE ENDS MEET: THE GROWTH OF CREDIT CARD DEBT IN THE '90S, at 35 (2003), available at http://www.demos.org/pubs/ borrowing_to_make_ends_meet.pdf (discussing the increase in fee usage after Smiley).
163. The rise of late fees after Smiley would make sense under the rational choice model if default interest rates triggered by late payment where reduced, but they were not. See Mark Furletti, Credit Card Pricing Developments and Their Disclosure 8 (Fed. Reserve Bank of Phila., Discussion Paper 03-02, 2003), available at http://www.philadelphiafed.org/pcc/ papers/2003/CreditCardPricing_012003.pdf (stating that issuers only started using default interest rates in the late 1990s).
164. See Lawrence M. Ausubel, The Failure of Competition in the Credit Card Market, 81 AM. ECON. REV. 50, 72 (1991).
165. See infra Part ILC.
166. See infra Part II.C.
167. See generally Bar-Gill, Bundling and Consumer Misperception, supra note 2 (discussing bundling as a seller's response to consumer misconception).
168. The following example is taken from id. at 38-39.
169. Id. at 45;
170. see also Bar-Gill, Informing Consumers, supra note 22, at 21.
171. This pricing flexibility requires that ink for a seller's printer be purchased only from the same seller. This is in fact the meaning of bundling. Such bundling can be achieved through patent protection of the printer-ink cartridge interface. A recent threat to the printer and ink bundle comes from sellers offering to refill consumers' ink cartridges. But the refill option is still limited. Questions about the quality, reliability, and ease of operation of the refill option remain. See, e.g., ConsumerReports.org, Do-It-Yourself Refills Are Cheap, But Be Prepared for a Mess, July 2006, http://www.consumerreports .org/cro/electronics-computers/computers/computer/ printers/printer-inks-7-06/do-it-yourself-refills/0607_printer-inks_do-it- yourself-refills.htm;
172. ConsumerReports.org, Printer Inks: More Choice & Value, July 2006, http://www.consumerreports.org/cro/electronics-computers/computers/ computer/printers/printer-inks-7-06/overview/0607_printer-inks_ov.htm. But more sophisticated and effective ink refill options are emerging.
173. See, e.g., Tom Mainelli, Inke Unveils Clean, Cheap Ink Jet Refills, PC WORLD, Jan. 8, 2006, http://www.pcworld.com/article/id,114170- page,1/article.html. Printer manufacturers, in an effort to sustain using the bundle, are trying to convince consumers that the refill option is inferior.
174. For example, the HP website refers to a commissioned study finding that ink cartridges score lower on both quality and reliability. See HP, The Truth About Ink Refills and Remanufactured Ink, http://h71036.www7.hp.com/hho/ cache/546038-0-0-225-121.html?jumpid-reg_ R1002_USEN (last visited Nov. 30, 2007)
175. (directing users to QUALITYLOGIC, RELIABILITY COMPARISON STUDY: HP INKJET PRINT CARTRIDGES VS. REFILLED BRANDS: CARTRIDGE RELIABILITY, PRINT QUALITY (2005), http://www.hp.com/united-states/consumer/inkjet/qualitylogic_study.pdf).
176. These efforts are at least partially successful - ink cartridge sales are a multibillion dollar business for HP, See John Lui, HP Holds Patent for Ink-Refill Device, ZDNET.CO.UK, Oct. 20, 2003, http://news.zdnet.co.uk/emergingtech/0,1000000183,39117220,00.htm.
177. In his contribution to this Exchange, Epstein argues that there are sophisticated, business buyers of printers and ink and that less-sophisticated consumers free-ride off the expertise of these more-sophisticated buyers. See Epstein, Exchange, Neoclassical Economics, supra note 4, at 830. Such free-riding is possible, however, only if sellers cannot segment the market and differentiate between the sophisticated business buyers and the less-sophisticated consumers. While further empirical investigation is necessary, casual observation suggests that the printers market is at least partially segmented.
178. See Stefano Della Vigna & Ulrike Malmendier, Paying Not to Go to the Gym, 96 AM. ECON. REV. 694, 714 (2006) ("[F]lat-rate contracts are on average more profitable for the health clubs than pay-per-visit contracts. Health club employees, therefore, have incentive to persuade consumers to sign flat-rate contracts.").
179. For evidence of the large disparity between the expected and the actual number of health club visits, see id.
180. Cf. Joseph Farrell & Paul Klemperer, Coordination and Lock-In: Competition with Switching Costs and Network Effects § 2.3.1 (unpublished manuscript, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 917785) ("[F]irms are willing to price below cost in period 1 to acquire the customer who will become a valuable follow-on purchaser in period 2 . . . .").
181. See, e.g., Shui & Ausubel, supra note 53, at 7-8.
182. Cf. Farrel & Klemperer, supra note 105, § 2.4.5.
183. See id. § 2.8.3.
184. See Furletti, supra note 94, at 2.
185. See EVANS & SCHMALENSEE, supra note 94, at xii, 164-67 ("[Credit card issuers] have chosen to collect a larger portion of their revenues from finance charges. This pattern may arise in part because of their view that the overall demand for credit is relatively insensitive to interest rates, a view supported by at least one empirical study and considerable folklore within the industry.").
186. See Ausubel, supra note 95, at 72 ("[T]he experience
187. See Bar-Gill, supra note 2, at 1401-02.
188. See Furletti, supra note 94, at 2-3.
189. See id.
190. See id. at 10-14.
191. In Beasley v. Wells Fargo Bank, 1 Cal. Rptr. 2d 446 (Ct. App. 1991), the bank's "Credit Card Task Force" proposed increasing "late" and "overlimit" fees as a "good source of revenue."
192. Id. at 448.
193. Penalty fees are perceived as a good source of revenue, because the industry perceives that "there (are) very few cardholders that switch cards because the late fee is too high." Credit Card Fees Soar Again, CNNMONEY.COM, Aug. 18, 1998, http://money.cnn.com/1998/08/18/banking/ q_bankrate (quoting Peter Davidson, Executive Vice President, Speer & Associates) (internal quotation marks omitted).
194. See Fee Income, CARDFLASH, Jan. 10, 2007 (subscription-restricted Internet source, on file with the author).
195. Penalty fees began their rapid growth in 1996 when the Supreme Court, in Smiley v. Citibank, 517 U.S. 735, 735 (1996), exempted late and over-limit fees from state-level regulation.
196. See also DRAUT & SILVA, supra note 94, at 35.
197. See CARD INDUSTRY DIRECTORY, supra note 54, at 11.
198. See U.S. GOV'T ACCOUNTABILITY OFFICE, CREDIT CARDS: INCREASED COMPLEXITY IN RATES AND FEES HEIGHTENS NEED FOR MORE EFFECTIVE DISCLOSURES TO CONSUMERS 49 (2006).
199. See 2005 Credit Card Survey, CONSUMER ACTION NEWS (Consumer Action, San Francisco, Cal.) Summer 2005, at 1, available at http://www.consumer-action.org/downloads/english/ CC_Issue_2005.pdf (detailing the most prevalent triggers of universal default rate hikes).
200. See U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 120, at 49-50.
201. Compare Bar-Gill, Seduction by Plastic, supra note 2, at 1407 (describing how consumers underestimate "the probability of paying late or exceeding their credit limit"),
202. with 2005 Credit Card Survey, supra note 121, at 1 (stating that paying late and going over the credit limit are important factors contributing to a universal default rate hike). Another recent innovation also magnifies the cost of penalty fees. Some issuers are dividing up credit extensions between multiple cards so that a customer with a $2500 credit limit will be issued five cards with five $500 limits (instead of a single card with a $2500 limit).
203. Five cards mean five opportunities to pay late fees, overlimit fees, etc. See Robert Berner, Cap One's Credit Trap, BUS. WK., Nov. 6, 2006, at 35, 35.
204. Epstein argues that introductory periods with low introductory rates are a reasonable mechanism for providing valuable information to rational consumers. Epstein, Behavioral Economics, supra note 1, at 129-31. In making this argument, Epstein relies on the free samples in a bakery analogy: "So what is wrong with teaser rates anyhow? Go into any bakery and there are free samples that are intended to entice customers into purchases."
205. Id. at 131. This analogy is inapt. There is significant uncertainty about the quality of the baker's product. But money is money. Epstein himself argues that issuers are offering a standardized good.
206. See id. at 131. Epstein also asserts that a consumer needs the introductory period to evaluate the bank's customer service.
207. See id. at 129-131. This is unconvincing, however, as survey evidence suggests that customer service is not among the product attributes that attract most consumers.
208. See EVANS & SCHMALENSEE, supra note 94, at 225.
209. See Bar-Gill, Seduction by Plastic, supra note 2, at 1405-07.
210. See Ausubel, supra note 61, at 263 ("[A] substantial portion of credit card borrowing still occurs at post-introductory interest rates . . . . Thus finance charges paid to credit card issuers have not dropped as much as the introductory offers might suggest.");
211. David I. Laibson et al., A Debt Puzzle, in KNOWLEDGE, INFORMATION, AND EXPECTATIONS IN MODERN MACRO-ECONOMICS: IN HONOR OF EDMUND S. PHELPS 228, 228-29 (Philippe Aghion et al. eds., 2003) (finding that consumers pay high effective interest rates "[d]espite the rise of teaser interest rates").
212. Shui & Ausubel, supra note 53, at 25-26.
213. Cf. Farrel & Klemperer, supra note 105, § 2.8.3.
214. Cf. Bar-Gill, Seduction by Plastic, supra note 2, at 1406 (describing how rational consumers would anticipate the lock-in effect, but that most consumers are not rational in this respect).
215. Id. at 1407.
216. Id. at 1405-07.
217. Lawrence M. Ausubel, Adverse Selection in the Credit Card Market 21 (June 17, 1999) (unpublished manuscript, available at http://www.ausubel .com/ere ditcard-papers/adverse.pdf).
218. See EVANS & SCHMALENSEE, supra note 94, at 225.
219. See U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 120, at 27 (noting how in most cases "cardholder payments [are] allocated first to the balance that is assessed the lowest rate of interest").
220. Id. at 27-28 (describing the two-cycle billing method).
221. See Epstein, Behavioral Economics, supra note 1, at 127-28.
222. Id.
223. Bar-Gill, Seduction by Plastic, supra note 2, at 1385-86.
224. See MANN, supra note 94, at 66-68 (arguing that a causal link exists between credit card debt and bankruptcy filings).
225. But see Todd J. Zywicki, The Economics of Credit Cards, 3 CHAP. L. REV. 79, 82, 166-70 (2000) (arguing that such a causal link does not exist).
226. See Epstein, Behavioral Economics, supra note 1, at 128.
227. Id.
228. Id.
229. Consumers who are perfectly informed and perfectly rational will take advantage of the available credit only when the benefit of credit exceeds the expected cost of credit, specifically, the costs of financial distress that might lead to bankruptcy.
230. See Epstein, Behavioral Economics, supra note 1, at 128.
231. Id.
232. Id.
233. Id.
234. See MANN, supra note 94, at 66-68.
235. Cf. id. at 67 (contrasting credit card debt with other types of consumer
236. debt such as mortgages and loans).
237. See Epstein, Behavioral Economics, supra note 1, at 127.
238. 280 F.3d 384 (3d Cir. 2002).
239. See Epstein, Behavioral Economics, supra note 1, at 125-27.
240. Rossman, 280 F.3d at 387-89.
241. Id. at 394-95.
242. See Epstein, Behavioral Economics, supra note 1, at 126.
243. Id. at 127.
244. See id. at 126-27
245. (quoting Rossman, 280 F.3d at 388) (internal quotation marks omitted).
246. See id. at 127.
247. See id.
248. See Shui & Ausubel, supra note 53, at 25-26.
249. See Gross & Souleles, supra note 65, at 171.
250. Bar-Gill, Seduction by Plastic, supra note 2, at 1392-93.
251. See id. (noting that most borrowing is done at high post-promotion rates rather than at low teaser rates).
252. See Epstein, Behavioral Economics, supra note 1, at 127 (noting that because most people have multiple credit cards, an increase in rates on one card will likely generate a migration of business elsewhere).
253. See id. ("[Banks'] self-interest is a powerful market constraint against excessive borrowing.").
254. Epstein, Behavioral Economics, supra note 1, at 127.
255. See Ausubel, supra note 61, at 251-57 (analyzing bankruptcy data alongside credit card delinquency and credit card chargeoff data).
256. See id.
257. See Ronald J. Mann, Bankruptcy Reform and the "Sweat Box" of Credit Card Debt, 2007 U. ILL. L. REV. 375, 386-90.
258. See id. at 384-86 (describing the sweat box model as one in which lenders profit from borrowers who become financially distressed, generating profits on late fees, over-limit fees, and the borrower's ever growing balance).
259. See Ausubel, supra note 61, at 251-57.
260. See Mann, supra note 94, at 385-86 ("For the credit card lender, the first hint of sustained profitability comes when the cardholder (now borrower) stops regularly paying her balance in full each month.").
261. See id. at 201-03 (discussing the ability of lenders to optimize their default rates and externalize losses to other parties).
262. See Shui & Ausubel, supra note 53, at 8. The $250 cost of failing to switch cards post-introductory period was calculated by multiplying the average balance on credit cards ($2500) by the common margin between introductory and post-introductory interest rates (10%).
263. See id.
264. See Gross & Souleles, supra note 65, at 178-80. More than 90% of consumers with credit card debts have some liquid assets in checking and savings accounts, and one-third of credit card borrowers hold more than one month's income in these liquid assets.
265. Id. With a median balance of more than $2000 (conditional on having a balance, i.e., the median balance among consumers who have a positive balance) and a spread of 10% between credit card interest rates and interest rates on checking and savings accounts, a typical consumer is losing more than $200 a year in interest payments.
266. See id.
267. Recent evidence shows a causal link between unsafe financial products and financial distress, including bankruptcy. See MANN, supra note 94, at 66-68.
268. This number is based on the following data: about seventeen million households open a new general purpose credit card account each year and about 50% of new accounts include introductory rates. Fixed Rate vs. Intro Rate, CARDFLASH, July 29, 1999 (subscription required Internet source, on file with the author) (reporting findings from a 1999 study of account acquisition and attrition conducted by PSI Global). Additionally, at least 50% of cardholders carry a balance.
269. See Gross & Souleles, supra note 65, at 151 (discussing the number of households that carry a balance on their cards). I recognize that cards with introductory offers might be issued at different rates to borrowing and nonborrowing consumers/households. Nevertheless, the preceding calculation probably yields a conservative estimate, if issuers are more likely to target introductory offers to borrowers and/or if borrowers are more likely to be attracted by introductory offers.
270. In his contribution to this Exchange, Epstein correctly points out that the $350 million figure is not a direct social cost. See Epstein, Exchange, Neoclassical Economics, supra note 4, at 825. Rather, it is a transfer from consumers to issuers or, in a competitive market, from one group of consumers-those who make mistakes - to another group of consumers - those who do not make mistakes. Still, such a transfer from a weaker group to a stronger group constitutes a social cost.
271. MANN, supra note 94, at 66-68.
272. See, e.g., Adam Feibelman, Defining the Social Insurance Function of Consumer Bankruptcy, 13 AM. BANKR. INST. L. REV. 129, 162-63 (2005);
273. Melissa B. Jacoby, Bankruptcy Reform and Homeownership Risk, 2007 U. ILL. L. REV. 323, 330-31;
274. Robert M. Lawless & Stephen P. Ferris, Economics and the Rhetoric of Valuation, 5 J. BANKR. L. & PRAC. 3, 8 n.22 (1995).
275. See Eric A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. LEGAL STUD. 283, 307-08 (1995).
276. U.S. DEP'T OF DEFENSE, REPORT ON PREDATORY LENDING PRACTICES DIRECTED AT MEMBERS OF THE ARMED FORCES AND THEIR DEPENDENTS 35-36, 45, 86-87 (2006), http://www.usa4militaryfamilies. dod.mil/dav/lsn/LSN/BINARY_RESOURCE/BINARY_CONTENT/2141721.pdf.
277. The DOD report also describes how military personnel in financial distress become more vulnerable to extortion and, consequently, can lose their security clearance. Id. at 35-36, 45.
278. For a similar discussion, see Bar-Gill & Warren, supra note 38, at 36-37 (arguing that unsafe credit products skew the distribution of resources within society, resulting in regressive redistribution).
279. See, e.g., U.S. DEP'T OF DEFENSE, supra note 183, at 10-22 (describing predatory lending to enlisted military personnel who often lack the experience and education to avoid such pitfalls).
280. See Epstein, Behavioral Economics, supra note 1, at 116-18, 128.
281. See id. at 125, 128.
282. Cf. Jolis et al., Behavioral Approach, supra note 3, at 1541 (engaging in a normative analysis of anti-anti-paternalism).
283. See Epstein, Behavioral Economics, supra note 1, at 115-18.
284. See id. at 116.
285. See id. at 116-17.
286. See, e.g., Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. LEGAL STUD. 1, 4-5 (1978).
287. See supra Part U.C.
288. See Kronman, supra note 193, at 4-5.
289. One of the exceptions to the contract law rule refusing to recognize an excuse for unilateral mistake is the case of an accounting or a clerical error, where the nonmistaken party is in a better position to detect the mistake and prevent the potential allocative inefficiency that might follow from it. See, e.g., Boise Junior Coll. Dist. v. Matters Constr. Co., 450 P.2d 604, 609 (Idaho 1969).
290. See Epstein, Behavioral Economics, supra note 1, at 115-17.
291. The facts in Rossman provide an example of such misleading statements. Rossman v. Fleet Bank (R.I.) Natl Ass'n, 280 F.3d 384, 387-89 (3d Cir. 2002).
292. See Epstein, Behavioral Economics, supra note 1, at 121-22 ("But at this point the behavioral critique loses much of its bite, because it can no longer predict any systematic direction to the market errors . ... [I]t is hard to make policy recommendations in the absence of information as to which effect is likely to be most profound in any given setting. The behavioral critique lacks real bite.");
293. see also Epstein, Second-Order Rationality, supra note 3, at 364 ("Dwelling on imperfections of ordinary individuals carries no clear implication as to the appropriate policy choice because there is no directionality to these cognitive errors.").
294. See Epstein, Behavioral Economics, supra note 1, at 121.
295. See supra Parts ILB-C.
296. See, e.g., HERBERT HOVENKAMP, THE ANTITRUST ENTERPRISE: PRINCIPLE AND EXECUTION 13-20 (2005).
297. See, e.g., id. at 77-91 (describing the complex fact-finding process for antitrust suits).
298. See Epstein, Behavioral Economics, supra note 1, at 128-29.
299. Id.
300. See id. ("One key difficulty with all prophylactic legislation is that it tends to ignore striking differences by treating persons, even within narrow socioeconomic groupings, as part of some homogeneous mass.").
301. Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism Is Not an Oxymoron, 70 U. CHI. L. REV. 1159, 1190 (2003) ("If feasible, a comparison of possible rules should be done using a form of cost-benefit analysis, one that pays serious attention to welfare effects. In many cases, however, such analyses will be both difficult and expensive.").
302. Epstein, Behavioral Economics, supra note 1, at 129 ("Who is confident enough to decide which error counts for more, and to spend public money on the strength of their speculations?").
303. See generally Colin Camerer et al., Regulation for Conservatives: Behavioral Economics and the Case for "Asymmetric Paternalism," 151 U. PA. L. REV. 1211 (2003);
304. Sunstein & Thaler, supra note 205.
305. See Epstein, Behavioral Economics, supra note 1, at 125, 128.
306. A regulatory mechanism, which is somewhat similar to mandatory disclosure, uses public information campaigns to undo consumer misperception. Epstein argues that public information campaigns are unnecessary, since "[ajnyone can enter the market on information. . . . And by putting the government into the fray, there is always the risk that debiasing will take the form of rebiasing, by overstating credit card risks to individuals who would do well to have them." See Epstein, Behavioral Economics, supra note 1, at 131. While Epstein is right that anyone can enter the market for information, non-government entities might not have sufficient incentives or sufficient funding to mount effective information campaigns. The risk of rebiasing is also a valid concern-one that needs to be weighed against the benefits of debiasing.
307. See generally Christine Jolis & Cass R. Sunstein, Debiasing Through Law (U. Chi. Law Sch. John M. Olin Law & Econ. Working Paper Series, Paper No. 225 (2d series), 2005), available at http://ssrn.com/abstract-590929.
308. See Camerer et al., supra note 207, at 1224-30;
309. Sunstein & Thaler, supra note 205, at 1162-67.
310. See Epstein, Behavioral Economics, supra note 1, at 131.
311. Id.
312. See supra Parts II-III.
313. Another way to address the heterogeneity concern is by screening for sophistication. For example, under Regulation D, the SEC proscribes all but the very wealthy, who qualify as "accredited investors," from investing in hedge funds. See 17 C.F.R. § 230.501 (2007) (defining the term "accredited investor"). One reason for this regulation is that the rich have a greater tolerance for risk. Another reason is that wealth can serve as a proxy for sophistication, especially since money can buy expert advice. By the same token perhaps some consumers should be denied access to mortgage loans or credit cards. The financial risk imposed by these products is substantial. Evidence suggests that not all consumers are sufficiently informed and sufficiently rational to understand the risk and protect against it.
314. See, e.g., Korobkin, supra note 46, at 1209-44. The problem, of course, is that accurate proxies for screening consumers are hard to come by, and using wealth as a proxy might result in denial of valuable products and services to poor consumers.
315. See Epstein, Behavioral Economics, supra note 1, at 128.
316. Id.;
317. see also Stephen J. Choi & A.C. Pritchard, Behavioral Economics and the SEC, 56 STAN. L. REV. 1, 5-6 (2003) ("[I]f everyone suffers from cognitive defects, doesn't that also include [the regulators]?").
318. See Epstein, Behavioral Economics, supra note 1, at 125, 128;
319. see also Truth in Lending Act, 15 U.S.C. §§1601-1667 (2000).
320. See Epstein, Behavioral Economics, supra note 1, at 125, 128.
321. 280 F.3d 384 (3d Cir. 2002).
322. See id. at 387-89.
323. Id. at 387-88.
324. Id.
325. Id.
326. Id. at 388-89.
327. See Epstein, Behavioral Economics, supra note 1, at 126.
328. See Rossman, 280 F.3d at 394 ("[W]e believe a reasonable consumer would ... be entitled to assume upon reading Fleet's solicitation that the issuer was committed to refraining from imposing an annual fee for at least one year. The statement 'no annual fee,' in other words, is fairly understood to contain an implied term of a year.").
329. See Epstein, Behavioral Economics, supra note 1, at 126.
330. Rossman's "no annual fee for one year" interpretation does not comport with Fleet's expectations either. Fleet did not think that it had to wait a year before imposing an annual fee. See Rossman, 280 F.3d at 388-89.
331. Epstein acknowledges that "the bank had planned from the outset to impose an annual fee before the end of the year." See Epstein, Behavioral Economics, supra note 1, at 126.
332. More comprehensive disclosure might not reduce the incidence of consumer mistakes, because of the risk of information overload. Imperfectly rational consumers can process only a limited amount of information. See, e.g., Korobkin, supra note 46, at 1209-44. Therefore, more disclosure does not necessarily mean better-informed consumers.
333. See U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 120, at 46 (finding that credit card disclosures contain too much information);
334. Richard Craswell, Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere, 92 VA. L. REV. 565, 578 (2006) (arguing that provision of additional information dilutes the effectiveness of existing disclosures);
335. Furletti, supra note 94, at 19 (concluding that it is not clear that requiring more details in regulatory disclosures would be useful for consumers).
336. See DRAUT & SILVA, supra note 94, at 35 (finding that most major issuers consider a payment late if it arrives after 2:00 p.m. on the due date).
337. See 15 U.S.C. § 1601(a) (2000) (discussing the purpose of the disclosures).
338. See MANN, supra note 94, at 131-32 (describing the current disclosures in credit card agreements).
339. There are examples of existing disclosure regulations that mandate use-pattern disclosures. See, e.g., 15 U.S.C. § 2056 (2000) (providing the Consumer Products Safety Commission with authority to promulgate "requirements that a consumer product be marked with or accompanied by clear and adequate warnings or instructions" in order to ensure products are used correctly). Still, in many consumer markets use-pattern disclosure is missing. And, where use-pattern disclosure is required, the use-pattern information disclosed is often insufficient.
340. See Bar-Gill, Informing Consumers, supra note 22, at 46-53 (providing examples of such inefficiencies).
341. Cf. Thomas A. Durkin, Requirements and Prospects for a New Time to Payoff Disclosure for Open End Credit Under Truth in Lending 25 (Fed. Reserve Bd., Fin. and Econ. Discussion Series, Paper No. 2006-34, 2006), available at http://www.federalreserve.gov/pubs/feds/2006/200634/ ("Beyond the consumer surveys, specific information on consumers' payment patterns has heretofore been available only to the creditors who issue the cards.").
342. See id. at 40-41 (explaining a sample of credit card account information "assembled in 2001 from the portfolios of five of the fifteen largest credit card issuers").
343. See id.
344. See id. at 41 (detailing the consumer specific information retained by credit card issuers).
345. For instance, consumers can easily access their own credit information via credit reports on the Internet. See, e.g., Experian, Free Credit Report and Credit Score, http://www.experian.com/ (last visited Nov. 30, 2007). Additionally, consumers can access reports and statistical data on government and nongovernmental organizations' websites, as well as through the use of free research databases.
346. See, e.g., Social Science Research Network, http://www .ssrn.com/ (last visited Nov. 30, 2007).
347. See Furletti, supra note 94, at 6-9 (discussing card issuers' use of collected information to adjust rates).
348. MANN, supra note 94, at 192 ("[A] point-of-sale reminder of the account balance might cause a consumer to respond differently. The consumer could switch to another payment device or discontinue the sales transaction entirely.").
349. See id. at 160 ("[T]he most obvious point to focus a disclosure would be at the point of borrowing,").
350. Bar-Gill, Seduction by Plastic, supra note 2, at 1419;
351. see also MANN, supra note 94, at 160-61 (arguing for individual reports on debt repayment time and cost at the point of borrowing);
352. Thomas A. Durkin, Credit Cards: Use and Consumer Attitudes, 1970-2000, 86 FED. RES. BULL. 623, 629 (2000) ("Many holders of bank-type cards in 2000 said that it would be helpful to include on their billing statement information about the length of time it would take to pay off the balance if only the minimum payment were made each month.").
353. Such an individualized warning, tailored to the consumer's actual repayment record, should be more effective than the general warning that Congress recently enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. See Pub. L. No. 109-8, § 1301, 119 Stat. 23, 204-08 (2005). A more individualized version of § 1301 was soundly defeated by the issuers' lobby in the House of Representatives.
354. See H.R. 1052, 107th Cong. (2001).