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Standardization as a Solution to the Reading Costs of Form Contracts

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  • Abraham L. Wickelgren

Abstract

It 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.

Suggested Citation

  • Abraham L. Wickelgren, 2011. "Standardization as a Solution to the Reading Costs of Form Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(1), pages 30-44, March.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201103)167:1_30:saastt_2.0.tx_2-4
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    Citations

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    Cited by:

    1. Abraham L. Wickelgren, 2016. "An Economic Analysis of Arbitration versus Litigation for Contractual Disputes," Journal of Law and Economics, University of Chicago Press, vol. 59(2), pages 393-410.
    2. Margaret Jane Radin, 2011. "Form Contracts and the Problem of Consumer Information," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(1), pages 49-55, March.

    More about this item

    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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