The Unconventional Uses of Transaction Costs

Abstract

This article discusses the strategic advantages suppliers can derive from the transaction costs they can impose via the terms of their contracts. As the Article demonstrates, such transaction costs could be imposed by the supplier to enable the screening out of unwanted consumers, price discrimination, cartel stabilization, anticompetitive signaling, studying consumer preferences, hiding benefits granted to parties from nonparties, and creating the appearance of a fair contract. The transaction costs could also be self-imposed by the supplier, in order to signal to buyers or to competitors that negotiation of the contract would be very costly. One of the Article's conclusions concerns the legal treatment of standard form contracts. In particular, the law's concern should not be only with harsh boilerplate terms, but also with beneficial boilerplate terms. At times, beneficial boilerplate terms extract surplus from uninformed consumers, exactly as harsh terms do, but by using a different technique. Another conclusion of the Article is that boilerplate language should be carefully reviewed even when no particular terms are hidden in it, neither beneficial nor harsh, because the boilerplate provisions could be used just for the sake of artificially complicating the transaction. The Article also inquires whether the use of beneficial boilerplate terms is desirable from a social perspective, and if not, it asks how the law should discourage it.