Oren Bar‐Gill, Seduction by Contract: Law, Economics, and Psychology in Consumer Markets, Oxford: Oxford University Press, 2012, 280pp, hb £ 26.99, pb £14.99.
| DOI | http://doi.org/10.1111/1468-2230.12093 |
| Date | 01 November 2014 |
| Published date | 01 November 2014 |
REVIEWS
Oren Bar-Gill,Seduction by Contract: Law, Economics, and Psychology in
Consumer Markets, Oxford: Oxford University Press, 2012, 280pp, hb £ 26.99,
pb £14.99.
The current revival of behavioural economics finds ready application to con-
sumer contracts. Once the normal assumption of economic analysis that people
always act rationally in their own self-interest is modified, economists can begin
to grasp better the typical problems that arise in retail markets caused by the
‘irrationality’ of consumers. Consumers act below the standard of the economi-
cally rational individual in the sense that they may fail to acquire the necessary
information to make a sensible decision, they typically discount risks of disap-
pointment or uncertain contingencies, and they may fail to make an accurate
estimate of the total costs of the product in comparison to its expected benefits.
Of course, it is rational for the consumer to try to minimise the costs of
discovering all this information and of making the appropriate calculations by
avoiding lengthy enquiries and investigations. Even allowing for that rational
saving in search costs, however, consumers typically are subject to behavioural
biases when making purchasing decisions in comparison to the ideal rational
choice model, with the result that the purchase is inefficient in a technical sense.
For instance, a consumer who wishes to purchase a printer for a computer
efficiently should assess the cost per printed page over the lifetime of the printer
according to the consumer’s expected usage, a calculation that includes the initial
cost of the printer plus the cost of the add-ons of printer cartridges. In practice,
consumers are likely to compare the up-front costs of printers alone, without
seeking the hard-to-find information about running costs including costs of
repairs or making an accurate assessment of future usage. The result is that
consumers will probably not purchase the printer that is most efficient for them
in the sense that the cost per page of print will not be the lowest available on the
market.
Embracing such consumer misperceptions of self-interest, retailers and sup-
pliers market their products to take advantage of irrational (ie less than perfectly
rational) behaviour and biases. A retailer will minimise the initial cost of the
product in order to gain greater market share, but retain or improve profitability
by charging well above cost for add-ons subsequently required by the consumer
such as replacement printer cartridges or servicing and repairs. The initial cost of
the product can sometimes be reduced to zero, as in the case of mobile phones,
provided that there is a reliable way of securing a future income stream from the
consumer that will comfortably exceed the supplier’s costs. Competition in the
market may compel all or virtually all retailers to adopt similar marketing
strategies, because few consumers will respond positively to high up-front costs
accompanied by assurance of low add-on costs (even though the total cost would
be lower).
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© 2014 The Authors. The Modern Law Review © 2014 The Modern Law Review Limited. (2014) 77(6) MLR 1030–1047
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
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