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Valparaiso Univ. Law School

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Wednesday, March 27, 2013

Online Symposium on Oren Bar-Gill's Seduction By Contract, Part IIIB: Nancy Kim on Cell Phone Contracts

KimThis is the seventh in a series of posts on Oren Bar-Gill's recent book, Seduction by Contract: Law Economics, and Psychology in Consumer Markets.  The contributions on the blog are written versions of presentations that were given last month at the Eighth International Conference on Contracts held in Fort Worth, Texas.  Today is the second of a two-part contribution from our own Nancy Kim of the California Western School of Law.

Bar-Gill argues that the three part design of cell phone contracts (summarized in yesterday's post) imposes welfare costs by preventing efficient switching of plans and discouraging comparison shopping and by regressively redistributing wealth from the consumers to carriers, and from lesser informed (and presumably poorer) consumers to better informed (and presumably richer) consumers.  He also argues that market solutions are limited as providers must respond to the biased demands of consumers or else be driven out of the marketplace.

I tend to agree but only to a point.  I do think in many markets, and the cell phone service market is one, consumers eventually wise up (i.e. after “bill shock”) and competition heats up in response to consumer dissatisfaction.   The problem is that it might take a while, and by the time consumers can muster up some momentum, the existing players have gotten bigger and more entrenched – and newer companies can’t compete in terms of marketing dollars.   In the cell phone space, for example, Walt Mossberg of the Wall Street Journal, recently reviewed a new upstart called Republic Wireless. The company’s offering is the exception to the standard three part contract design – they offer no contract.  Furthermore, users pay for the phone in exchange for which they pay a very low monthly fee – only $19.  (Users also have the option of paying less for the phone and slightly more for the monthly service).  The catch?  The reception itself isn’t as good because the technology isn't quite there yet – but it’s coming.  I think the bigger challenge for the company isn’t that calls sometimes get dropped – I use Sprint and my calls get dropped all the time! – it's getting their name out there (Republic who?) and overcoming consumer inertia.

SeductionBar-Gill proposes disclosure regulation as a way to deal with problematic contract design.   He’s right to a certain extent – while disclosure has been knocked as ineffective, the problem is really with the type of disclosure and not the notion of disclosure.  In other words, we need the right kind of information.  Bar-Gill proposes that carriers be required to disclose consumer use information (both specific to the consumer based upon past use as well as use by others similar to the consumer) and total cost of ownership information which would be the total amount paid by the consumer including overage charges on a yearly basis or over the duration of the plan.  He also proposes that there be real time disclosures or warning so consumers know before they make that call that they are about to exceed their plan limit. 

While I like his proposals, Bar-Gill omits one very important aspect of disclosure (which I have written about in other articles, most recently this one) – and that is visual design.  In other words, effective disclosure should mean both the right information as well as the right presentation of that information. You can require all the relevant information you want but if consumers don’t notice it, then they won’t read it.  How the information is disclosed is just as important, in my view, as what information is disclosed.  Furthermore, in some markets, regulatory action of business practices (and not just disclosure regulation) may be required.

I could go on, but I’ve already taken up too much space.  Hopefully this review has sparked your interest and made you want to run out and buy your own copy.  Oren Bar-Gill has written a useful and thought provoking book and I think that it’s essential reading for contracts profs (as is Margaret Jane Radin’s book, BOILERPLATE, which was also discussed on a different panel).

[Editor's note: we expect to have an online symposium on Boilerplate in May)

[Posted, on Nancy's behalf, by JT]

 

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