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Oren Bar-Gill, Seduction by Plastic, 98 Nw. U. L. Rev. 1373 (2004).

Abstract: In consumer contracts highly sophisticated corporations will often exploit consumers’ behavioral biases. Competition cannot cure such exploitation. On the contrary, competitive forces compel sellers to take advantage of consumers’ weaknesses. This general theme is demonstrated through a detailed case study of the credit card market. In designing the credit card contract, issuers deviate from efficient marginal-cost pricing in order to take advantage of consumers’ underestimation of their future borrowing. This prevalent bias explains several unique features of the credit card contract, including high interest rates, zero annual and per transaction fees, teaser rates, high late and over-limit fees, benefits programs, and low (and even negative) amortization rates. The identified market failure suggests that legal intervention may be required to protect consumers and to increase social welfare. Several specific policy responses areconsidered, including disclosure, regulation of unsolicited offers,unbundling of transacting and borrowing services, and usury ceilings. The role of contract law and bankruptcy law is also examined. More broadly, the credit card case study demonstrates that pricing patterns can be used as indicators of a behavioral market failure, signaling a potential role for legal intervention.