The Arcane Mystery of What Everyone Does

by on July 10, 2009 · 13 comments

At George Mason University a while back, I was treated to a preview of some economic research; this time, a paper studying whether or not consumers read the fine print. “Does Anyone Read the Fine Print? A Test of the Informed Minority Hypothesis Using Clickstream Data.”  Authored by Yannis Bakos, Florencia Marotta-Wurgler, and David Trossen. The conclusion: in online software sales, no one does. Barely anyone. Less than one percent.

Well, of course not. Do you? (I skim them, personally, but most of that is me wearing my legal scholar curiousity hat, not me as a consumer. I read contracts with moving companies rather more carefully, as a consumer. Otherwise, not really.)

But what does it all mean? According to the authors “the result casts doubt on the validity of the informed minority argument in a market where it has been invoked by both theorists and court; it also raises questions about the likely effectiveness of policies mandating increased contract disclosure to alleviate market failures.”

Actually, the study doesn’t quite do either of these things convincingly. For starters, the data set is too limited. It’s software sales only. And of those, only a small subset of software sales, since purchases through sites where you MUST scan down and click on the EULA were excluded–that is, most mass-market software. However. let us set aside this as a quibble, for now. I know I don’t read online or offline contracts or policies very often … or in very great detail. Most people seem to share this trait. So there is something here, although the data might not capture it very well. Let us go back to basics.

At the level of theory, consumers do not read contracts because it makes little sense for them to do so. Harm rarely results from not reading. It is “Rational ignorance.” But why does harm result so rarely? To explain this, along comes the “informed minority” theory. A few consumers do read, it was argued. For the theory to work, though, the minority of consumers needs to be enough to discipline sellers. Since the number might turn out to be very, very small in practice… do we toss the theory? And… more importantly, do we need more a more careful, watchful regulatory eye on consumers online and offline as a consequence, as some might suggest? From this data to theory and thence to policy is a much, much more giant step than first appears.

Because the bottom line remains. Every day there are billions and billions of transactions offline and online. Hardly anyone is reading the fine print. As Tom Hazlett astutely pointed out at the event, offline, there is often nothing to read. Do you write a contract when you sit down to eat in a restaurant? No. Many exchanges involve such implied contracts. Many others implicate statute law, which no one reads in their capacity as consumers. And yet more involve actual contracts which no one reads, or the meaning of which is not clearly comprehensible even to those who do read closely. And yet, overall, remarkable benefits come from this array of exchanges. And … the probability of actual harm linked to not reading the fine print? Tiny. From one standpoint, the “problem” is a non-problem.

But it is a fascinating puzzle nonetheless. If our ignorance of the content of these contracts is rational, why is it so? The habit of non-reading clearly present an opportunity for contract drafters to put all sorts of surprising nonsense in the contracts… Why is it not there?

Some think it is there. The fine print might include an arbitration clause, for example. Is this a mean trick to play on consumers, something that if one knew it was there one would go to another seller? Probably not. Studies suggest that arbitration awards tends to favor consumers slightly. Sellers put them in to avoid litigation costs (a benefit to consumers as well), not to harm consumers. What other devious stuff is in the fine print? Limitations on consequential damages? These are the damages of the sort that follow from “for want of a nail, a horseshoe was lost, for want of a shoe a horse was lost, for want of a horse… ” and so on. Well, if there were no limits on consequential damages, many products quite likely would not be offered, or not for long, or they would cost far more. This isn’t a good example of fine print harming consumers, either. Privacy policies? Again, real harm is rare and there are benefits to consumers from information sharing, as well (unless you are a theorist who values privacy in itself… but this seems to beg the question).

Some mechanism does discipline sellers. There is a potent force shaping these transactions. After all, sellers don’t stick the price of the product or other key information in the fine print (If prices were in the fine print, I bet people would read it then, so long as they knew it was there; if not, customers would vanish, perplexed, since no one would expect something really important like price to be in the fine print, and would be unlikely to look for it there unprompted). In the vast majority of cases, only stuff that really, really almost always does not matter gets in there, and it is pretty benign. There is a very, very low probability of mischief from this stuff. But Why? Why? Why? We hate mysteries.

Perhaps a partial answer is rooted in legal, rather than pure economic, thinking. Think of the contract or license not as one aspect of the whole product, like the color, but as something that has been bundled with the actual good (software, a restaurant meal, a lawnmower). Why is it there? People are looking to reduce risk. What if this happens? What if that happens? What if there is a dispute… What if? Both buyers and sellers want low risk and predictability. Consider again markets with no written contracts at all. Why are restaurant processes and customs for service and pricing and menus and service so much alike? The comfort of certainty for both sides. When there is a written contract, that force remains powerful. Contracts are shaped by hundreds of years of legal precedent. Writing one of these is a very conservative undertaking. If there is something weird in there, it presents an unknown element. What will a court do? We don’t know. And this would be bad. The instrument would no longer serve its basic function as guide to what is going to happen. Demand for certainty is so strong, and the market for contracts so responsive to this demand, that we can get away, most of the time, without reading. (Again, though, the mystery… why, why, why… how does signaling work here?).

One of the strangest ideas to have taken hold of the legal mind in the last century is the idea that contracts of adhesion are bad, because consumers do not get to negotiate the individual terms. Who the heck wants to do that? It would make every purchase an endless research process. Do consumers do better when they negotiate with, say, used car salesmen? No? Then why would we want to negotiate with software salesmen? Shoe salesmen? And so on.

Disclaimer. The fine print: This is yet another half-baked theory. Enjoy.

My original blog is here

  • dmarti

    Why don't more proprietary software vendors use a common license? The proprietary EULAs mostly say the same things — couldn't the BSA or somebody issue a standard one?

  • http://srynas.blogspot.com/ Steve R.

    Incredible, contracts of adhesion are designed to unilaterally “protect” the seller by “restricting” (depriving) the consumer of their rights. To assert that we can't due better by not taking the trouble to negotiate seems incredibly anti-free market. Are we to blindly accept whatever a company says is in our best interest?

    Ms. Singleton also makes the unbelievable assertion that the ability of the consumer to negotiate a contract would -> “make every purchase an endless research process.” and would not facilitate business. So we are to left with the conclusion that the role of the consumer is to mindlessly accept what a company gives us as somehow being in our best interest in-order to buy a product? As a counter viewpoint to facilitate commerce, companies could save significant dollars by not hiring lawyers to develop these “contracts” and not printing them. If these contracts of adhesion are pointless from the consumers point of view, then why do companies spend significant money developing and distributing them? Clearly not for the benefit of the consumer.

    While this may seem far fetched, if a company can include a contract of adhesion, why not the consumer? Ms.Singleton seems to take the position that only companies can issue contracts of adhesion, but I would advocate that if a company can generate such as so-called contract the consumer would also have the right to create their own contract of adhesion that can handed to the cashier at the time of sale that supersedes the company's. Based on Ms. Singleton assertion that contracts of adhesion facilitate business, companies should willingly accept the contracts of adhesion created by the consumer. After all it promotes sales!

  • dmarti

    Steve R. — you might want to read the Web Site User Agreement for my web site http://zgp.org/~dmarti/meta/tos/ and do something similar. (I was thinking of something like “by reading my blog you agree to send me a pony” but did that one instead.)

    And please don't call people “consumers” even if they are end users of a network service. Network value comes in at the endpoints, too.

  • http://srynas.blogspot.com/ Steve R.

    Point accepted. I guess that I am being a bit bipolar. Great EULA that you have there. :)

    Here is a link to Battle of the Forms by William Woodward. Ed Foster, who died, had a wealth of articles on his Gripe Line webpage exposing the abuses of EULAs and Contracts of Adhesion. Unfortunately, that wealth of information appears to be no longer (easily?) available.

    Mr. Woodward writes: “Increasingly, these fine-printed, boring documents are new “terms of contract” claiming to govern the relationship you have with the provider. The practice is common in all forms of business with business and consumers alike. But what is new is a set of provisions limiting your access to courts and juries and limiting your ability to get meaningful relief if the seller or lender either doesn’t comply with its service obligations or disobeys state or federal law.”

  • http://srynas.blogspot.com/ Steve R.

    Point accepted. I guess that I am being a bit bipolar. Great EULA that you have there. :)

    Here is a link to Battle of the Forms by William Woodward. Ed Foster, who died, had a wealth of articles on his Gripe Line webpage exposing the abuses of EULAs and Contracts of Adhesion. Unfortunately, that wealth of information appears to be no longer (easily?) available.

    Mr. Woodward writes: “Increasingly, these fine-printed, boring documents are new “terms of contract” claiming to govern the relationship you have with the provider. The practice is common in all forms of business with business and consumers alike. But what is new is a set of provisions limiting your access to courts and juries and limiting your ability to get meaningful relief if the seller or lender either doesn’t comply with its service obligations or disobeys state or federal law.”

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