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Standardization As A Solution To The Reading Costs Of Form Contracts, Abraham L. Wickelgren

Abraham L. Wickelgren

It is well-known that a monopolist cannot commit to offer a high quality contract to a consumer reading costs are postive. This paper shows that this also holds in a competitive environment with consumer heterogeneity if the contract space is unrestricted. If firms can offer standardized contracts from a finite set, however, each with a standardized name, this paper shows that, when reading costs are not too large, there exists an equilibrium in which firms offer the most efficient contracts from the set of named contracts and consumers purchase the most efficient contracts offered without incurring any reading costs.