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The Power of Shopping

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15 Responses

  1. DML says:

    what about cell phone contracts, or other utility service agreements, esp. in industries where there may only be two or three service providers, and they all have similar clauses in their agreements (i.e., mandatory binding arbitration of disputes)? these seem to be the essence of adhesion contracts because your power to go elsewhere for other options is so limited.

  2. Nate Oman says:

    DWL: The adhesion argument is generally presented as an issue that we identify by either saying that one party is big and the other party is small, or by saying that the contract is offered on a take it or leave it basis. My point is that so long as one can shop, the fact that you cannot dicker or that you are a little guy contracting with a big corporation doesn’t matter. Target is not powerful. I am powerful.

    Furthermore, the fact that everyone has the same terms doesn’t mean necessarily that we are witnessing something inherently suspect. For example, most supermarkets offer milk at basically the same price. This is not evidence that consumers lack choices. It is evidence that we are witnessing a relatively competitive market where prices have been driven down by the ability of consumers to shop. Likewise, the fact that everyone has mandatory binding arbitration clauses, for example, isn’t necessarily evidence of corporate power. It may well be evidence of the opposite, namely a market where price is being driven down to marginal cost and producers are scrapping for a way of limiting costs by shaving off a marginal frill on the service being offered. (In this case the marginal frill is the ability to sue in court without going through arbitration.)

  3. Eric Goldman says:

    How do the transaction costs of shopping around mitigate your Power? Eric.

  4. Nate Oman says:

    They limit it to a certain extent. On the other hand, corporations are not simply reacting to my shopping. They are reacting to the shopping of virtually all consumers, since they have a difficult time identifying which of us are serious shoppers and which of us are not. Hence, my power as shopper comes not only from my personal shopping but also from the shopping of my tribal compatriots. I am a third party beneficiary, as it were, of your shopping. Together we are powerful!

  5. Bruce says:

    Nate, what you are saying is generally correct for small, repeat purchases at physical locations. (Which may be one reason why such transactions are generally unencumbered by boilerplate terms — no consumer would agree to them.) However, for less frequent transactions, or online transactions at a distance, I think Kessler’s concerns become more compelling. There may be reputational effects even for larger or distant transactions, but they are dispersed and indirect — i.e., the consumer’s ability to defect is insignificant unless the consumer can also warn *other* consumers away as wekk. Aggregation of consumer opinions on the web seems to still be in its infancy, and my sense is that it is insufficient at the moment to have the same-sized effect on boilerplate that your ability to shop elsewhere has on retailers.

  6. The whole market fundamentalism thing works with obvious and material facts about a standard product, like the price of milk. But DML is on when it comes to cell phones. There are subtleties to purchasing products that are not in parity that are much harder to weigh than price. For instance, what about the carrier who advertises a “no contract” deal, but then locks the phone in such a way that it cannot be used on another network?

    And once you get out of the market for the privileged, you find that a lot of people don’t have any bargaining power or choice at all. Just think of all the people getting 500% payday loans to buy plastic trash at Walmart for their kids.

  7. Nate Oman says:

    Bruce: I think there is some truth to what you say. A couple of quick responses:

    1. I think that people tend to have at least some sense of the reputation of those involved in larger, less frequent transactions, e.g. Hyundai has a good reputation for honoring its warranties, Best Buy’s return policy is a huge hassle, etc. To the extent that these reputations are a function of boilerplate, then it seems to me that there is a pretty robust sense in which folks are shopping these terms.

    2. It seems to me that reputation is pretty robust on the internet as well. Ebay, for example, creates devices for the creation of individual reputations. People buy from Amazon because it is realiable, etc. etc.

    3. In large one time transactions — e.g. car purchases — parties are more likely to pay at least some attention to boilerplate issues, such as the scope of warranties.

    4. Note that you are teasing out all sorts of situations that really have nothing to do with the idicia that Kessler was concerned with. For Kessler it was a big guy v. small guy thing and a dickered v. take-it-or-leave-it thing. If what you say is right, however, the big-little distinction and the dickered-not-dickered distinction are doing virtually no work.

  8. Nate Oman says:

    Chris: Do we have reason to suppose that the sucky terms of a cell-phone deal are not reflected in the price? If they are, then we are not dealing with the sort of situation that Kessler talked about.

    As for the poor, it seems to me that the problem of pay day loans, etc. has nothing to do with boilerplate, fine print, or the like, but rather has to do with the fact that the poor are poor, and therefore confined to a relatively sucky market because they are a bad risk, or are perceieved as such. In other words, the objection has everything to do with issues of distributional justice (ie it sucks to be poor) but very little to do with justice in contracting per se.

    The above is not some sort of market fundamentalism. It is making the much more modest point that shopping is a surrogate for bargaining, and that the traditional indicia of contractual injustice put forward by Kessler, ie the presence of un-dickered terms, a large corporate contracter, etc. don’t make a lot of sense. There may be other indicia of contracts that should concern us (I certainly think that there are!), but I’m not convinced that they are the ones that most exercise first year contracts classes…

  9. D Conrad says:

    What about the fungibility (is that a word?) of goods? Milk is milk, more or less, and even cell phone service is fungible to a lesser extent. But things like software are arguably unique items, and contain unbargainable EULAs. Does the fairness of boilerplate agreements change depending on whether the boilerplate is attached to the product or the seller?

  10. Bruce says:

    Nate, just one clarification for now. With respect to reputation, I think a distinction can be drawn between a company’s overall reputation and the effect certain boilerplate terms (e.g., non-warranty terms, like choice of forum) may have on that reputation. (Warranties are a special case because they are perhaps the one term, other than price, that consumers are actually interested in.) I didn’t mean to deny that Internet companies may have robust reputations, it’s only that I am skeptical those reputations are reliably affected by the experience third-party consumers have had with infrequently invoked boilerplate terms.

  11. DML says:

    nate, my point is not that because there may be similar prices across the board, something suspect is necessarily afoot (although you cannot seriously rule out the possibility that there may be). i am responding to your statement: “so long as one can shop, the fact that you cannot dicker or that you are a little guy contracting with a big corporation doesn’t matter,” with the question: what if your shopping ability is severely limited in an industry dominated by one or two firms offering raw deals? i assume you derive shopping power from the ability to seek a better bargain, but doesn’t that power diminish when there is no better bargain to be had? finally, i return to the initial “something may be suspect” point: isn’t it assuming too much to conclude that just because prices are uniform, the market is working efficiently and benefitting the consumer? can’t uniform prices also be the result of inefficient markets, market dominance by an unscrupulous firm, or price-fixing?

  12. Paul Gowder says:

    Nate! Entry barriers! Is it a coincidence that the most insane adhesive contracts are in industries that require either massive infrastructure (cell phones) or massive wealth (banking/lending) to participate?

  13. Nate Oman says:

    DML: I am not claiming that uniform prices or terms are evidence that the market is working well. My point is simply that we would expect them in a well-working market. In actual fact I don’t think that they tell us much at all. If a market is dominated by a monopoly or oligopoly then I don’t think that shopping is an adequate remedy. I agree here, but it seems like a rather tautalogical point: the absence of shopping is what defines a monopoly after all!

    Paul: You are considerably more confident than I am about the emperical distribution of insane adhesive contracts across industries. First, it is not clear to me that all of these adhesive terms are insane. I don’t think that there is anything insane, for example, about agreeing to mandatory arbitration in the event of suit in order to get a slightly cheaper cell phone. The question is not whether or not the contract terms are “good” or “bad” but whether or not they are priced.

    Second, it seems to me that we see “adhesive” contracts (ie take-it-or-leave-it) contracts where there is a fair amount of competition, eg consumer electronics.

  14. Paul Gowder says:

    Nate: let me flesh out my positive claims about the distribution of adhesive contracts a little bit.

    Most meatspace consumer transactions don’t have written contracts as such. I don’t know how you give consumer electronics as an example: consumer electronics don’t get handed to you over the shop counter with a contract. (Cellphones, natch, excepted.) While they often have warranty contracts in the box, those contracts clearly aren’t priced, because they’re only presented to consumers in conjunction with an extra cost to rejection (taking the bloody thing back). Nobody could compete on an absence of spring-wrap contracts (my neologism for contracts that are sprung on you) unless they were willing to post the damn contracts on the outside of the box or something, which would be intimidating to consumers. As it stands, one can not shop around for springwrap. (Note to entrepreneurs: someone should start a subscription or advertising-based .com archiving the warranty forms of various popular electronics companies, to facilitate “shopping around.”) (Second note to entrepreneurs: I want royalties if you do it!)

    There’s also store-sold warranties, of course. Those are pretty much contrary to free market principles by definition, since for almost all customers the expected benefit is less than the cost and only consumers who are patently innumerate ever buy them. (Exceptions for highly fragile items, etc.)

    Software, again, comes with springwrap. (See previous note to entrepreneurs.)

    What other consumer purchases come with contracts? Autos, sure, but compare the sales contract (competitive marketplace) to the finance contract (less competitive marketplace). Cellphones. Loans.

    Cellphones are particularly interesting, because certain features of the contracts and the prices seem to be affirmative evidence of non-pricing. For example, my understanding is that many phones equipped with bluetooth have that bluetooth significantly crippled so that, for example, one can’t use the phone’s internet capacity as a modem for one’s palm pilot. Now, one can think of rational justifications for this, but none of them are convincing. E.g. (a) the providers think people will use the internet service more if they can do so from the bigger pda screen. Unlikely both because the general charges are similar for wireless internet whether via pda or cellphone bundle and because some plans still charge by bandwidth & I believe they still use crippled bluetooth. (someone correct me if I’m wrong please), (b) Price discrimination. Unlikely because nobody offers both crippled and uncrippled bluetooth in this country. (again, please correct if wrong). As far as I can tell, providing functional bluetooth would be close to costless. If the cellphone market were competitive, someone would be expected to compete on functioning bluetooth.

    Lets see. What else… Not priced = bad. Oppressive even if priced also = bad. Yes, I said it, terms that I characterize as “insane” are (more accurately, “might be”) bad even if they are reflected in discounts. Let me defend that last claim. See the slew of work around cognitive biases etc. I believe Cass Sunstein had (or has forthcoming) a recent article about credit cards which is particularly enlightening.

    Consider the example of arbitration. Assume that arbitration is good for sellers but bad for buyers, e.g. because sellers are repeat players in the forum. To what kind of consumer is the trade-off of discount for arbitration contract attractive? The person who underestimates the risk of future conflict, for one. If I’m selling cars, I have access to a vast pool of data which permits me to accurately determine in what percentage of cases conflict will manifest, and to determine my expected savings from arbitration accordingly. Consumers, on the other hand, have no such information. Moreover, I rather doubt that any consumer save a lawyer or an economist would even try to rationally calculate the risk of conflict in an attempt to judge the cost of an arbitration clause. Rather, they’re likely to satisfy themselves that they’re getting, e.g., a reliable car, and then become committed to the purchase. Hence, consumers are likely to demand a lot smaller discount for an arbitration clause than they’re worth. Competitive market or otherwise.

  15. Someone, Somewhere says:

    Who knows if this comment is too late to the party, but here goes….

    There is another significant aspect to the use of boilerplate/adhesion contracts etc: legalese. Unfortunately, people do not understand what they are signing away when they agree to these contracts. For example, a typical builder contract in Texas (to buy a house) provides for:

    1. Waiver of all express and implied warranties, except for the limited warranty provided by the builder;

    2. Binding arbitration;

    3. The ability for the builder to break the contract at any time and for any reason for $100-$350 in liquidated damages;

    4. The waiver of all rights in tort;

    5. Limitations on liability in contract and in tort equal to the return of the buyer’s deposits;

    6. A disavowal of all statements made by the seller’s representative (usually as an incorporation clause + “buyer’s representative has no authority to bind buyer”)

    And those are just some of the provisions that I could remember off the top of my head!

    When I read these contracts, I was aghast at the rights that they routinely had the buyer sign away. I was even more upset when the buyer’s representative did not understand the contract language, but still required you to sign it in order to build a house.

    Inefficiency (read: wrong prices) in the market are often the result of a lack of information… and when you need a law degree to understand the contract that you are signing, then there is a lack of information in the market and the risk assigned to buyers is not being fairly priced.

    Rather, the typical transaction is as follows:

    1. Buyer likes house

    2. Seller agrees to sell house, if buyer will sign contract.

    3. Buyer signs contract on the strength of seller’s representations that everything will be ok.

    4. Seller usually tries to accomodate buyer, unless things get too expensive.

    5. Transaction either completes successfully, or buyer is stuck with the sour result.

    This isn’t just one builder – all of the contracts I have reviewed have essentially identical provisions.

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