Standardization as a Solution to the Reading Costs of Form Contracts
AbstractIt is well-known that a monopolist cannot commit to offer a high-quality contract to a consumer reading costs are positive. This paper shows that this also holds in a competitive environment with consumer heterogeneity if the contract space is unrestricted. If firms can offer standardized contracts from a finite set, however, each with a standardized name, this paper shows that, when reading costs are not too large, there exists an equilibrium in which firms offer the most efficient contracts from the set of named contracts and consumers purchase the most efficient contracts offered without incurring any reading costs.
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Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.
Volume (Year): 167 (2011)
Issue (Month): 1 (March)
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Find related papers by JEL classification:
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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