March 2006 Vol. 104 No. 5 THE REVIEW

One-Sided Contracts in Competitive Consumer Markets

Lucian A. Bebchuk & Richard A. Posner

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 from these 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 Article.

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. This difference is important whenever it is difficult to specify contractual terms to cover every important contingency that courts could accurately and easily enforce. In such circumstances, opportunistic buyers might try to use “balanced” terms to press for benefits and advantages beyond those that the terms were actually intended to provide.

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