Elena D’Agostino and Daniel J. Seidmann
Buyers typically do not read the fine print in contracts, providing an incentive for a monopolist to draft terms which are unfavorable to buyers. This suggests that trade might be inefficient, and that regulation may both raise social welfare and protect buyers.
In this Nottingham School of Economics working paper, published in the European Economic Review, Elena D'Agostino and Daniel J. Seidmann model this problem as a game, proving that trade must then be inefficient. The authors show that regulation which mandates efficient terms raises welfare; though the monopolist is the only beneficiary. More interestingly, regulations which prohibit the least efficient terms may reduce welfare by inducing the monopolist not to offer favorable terms. These results are extended to markets in which some buyers are naive, showing that prohibiting the least efficient terms may also harm the naive buyers.
European Economic Review, "Protecting buyers from fine print", by Elena D'Agostino and Daniel J. Seidmann. http://dx.doi.org/10.1016/j.euroecorev.2016.05.004
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Posted on Monday 7th November 2016