One-sided contracts in competitive consumermarkets

Editor’s Note: This chapter shows that “one-sided” terms instandard contracts, which deny consumers a contractual benefit that seems efficient on average, may arise in competitive markets without informational problems (other than those of courts). A one-sided term might be an efficient response to situations in which courts cannot perfectly observe all the contingencies needed for an accurate implementation of a “balanced” contractual term when firms are more concerned about their reputation, and thus less inclined to behave opportunistically, than consumers are. The usual assumption in economic analysis of law is that in a competitive market without informational asymmetries, the terms of contracts between sellers and buyers will be optimal-that is, that any deviation fromthese terms would impose expected costs on one party that exceed benefits to the other. But could there be cases in which “one-sided” contracts-contracts containing terms that impose a greater expected cost on one side than benefit on the other-would be found in competitive markets even in the absence of fraud, prohibitive information costs, or other market imperfections? That is the possibility we explore in this chapter. We focus on the following asymmetry between seller and buyer in cases in which the latter is a consumer rather than another business or comparable entity: The seller in such a case may be deterred from behaving opportunistically by considerations of reputation; the consumer is not constrained by such considerations because he has no reputation to lose, assuming that his opportunistic behavior in a particular transaction will not become known to the market as a whole.