Consumer Behavior and Consumer Behavior and Disclosure in Online ContractsDisclosure in Online Contracts

Florencia Marotta-WurglerFlorencia Marotta-WurglerNew York University School of LawNew York University School of Law

Conference on Behavioral Industrial Organization and Conference on Behavioral Industrial Organization and Consumer Protection, UCLConsumer Protection, UCL

October 18, 2014October 18, 2014

Significant and growing every yearSignificant and growing every year $75 billion for second quarter of 2014 in US (15% $75 billion for second quarter of 2014 in US (15%

increase from 2013)increase from 2013)

Most consumer transactions and services online Most consumer transactions and services online (and off) are governed by fine print(and off) are governed by fine print EULAs, TOU, Privacy Policies, TOSEULAs, TOU, Privacy Policies, TOS

• Clickwraps, browsewrapsClickwraps, browsewraps

What happens if nobody reads it? What happens if nobody reads it?

Some EvidenceSome Evidence

Few people read standard form contractsFew people read standard form contracts

Increasing disclosure barely changes the rate of Increasing disclosure barely changes the rate of readershipreadership

Even Even requiring requiring assent fails to draw attention to assent fails to draw attention to SFC termsSFC terms

Contracts are complex and change frequently, Contracts are complex and change frequently, further complicating assentfurther complicating assent

Few people read SFCsFew people read SFCs

Bakos, Marotta-Wurgler & Trossen (2014) look for an Bakos, Marotta-Wurgler & Trossen (2014) look for an “informed minority” in a real market“informed minority” in a real market

Idea is that if enough readers are sensitive to terms, competition Idea is that if enough readers are sensitive to terms, competition forces sellers to offer reasonable onesforces sellers to offer reasonable ones

Often assumed, invoked by courts, but never testedOften assumed, invoked by courts, but never tested

Market is online shopping for softwareMarket is online shopping for software EULAs are quintessential modern form contractsEULAs are quintessential modern form contracts Comparison shopping is easy online—if informed minority exists, Comparison shopping is easy online—if informed minority exists,

should be hereshould be here

Visitor types Fraction of visitors

se1b1

se1(1 b1)

s(1 e1)b2

s(1 e1)(1 b2)

(1 s)e2

(1 s)(1 e2)

)1)(1()1()1(

)1(

21211111

1111

besbesbsebse

bsebse

Informed Minority = Shoppers who read

All shoppers

DataData

All visits by 40,091 households to 66 software All visits by 40,091 households to 66 software companies for one monthcompanies for one month

56 retail; 10 freeware; with non-“forced” EULAs56 retail; 10 freeware; with non-“forced” EULAs Visits defined as series of URLs and time on eachVisits defined as series of URLs and time on each Demographic information for each householdDemographic information for each household Contract, firm, and product informationContract, firm, and product information

““Readers” are those who click on EULA page and Readers” are those who click on EULA page and stay for at least one secondstay for at least one second

EULA Access: ResultsEULA Access: ResultsPanel B. At Least 5 Pages Accessed During Visit

Co. N of co.

visits

Mean N of pg.

clicks per co. visit

(s.d.)

Med. N of pg.

clicks per co. visit

Mean length of co. visit in

secs (s.d.)

Med. length of co. visit in

secs

N of EULA visits

(% of co.

visits)

Mean N of pg.

viewed before EULA access

(s.d)

Med. Length

of EULA access in secs

Mean length

of EULA access in secs

(s.d.)

Med. length

of EULA access in secs

Retail 40,697 35.3

(96.9)

14 837

(2,562)

292 49

(.12%)

23.1

(44.4)

29 50.16

(47.82)

29

Freeware 5,370 70.6

(416.5)

11 741.5

(3,993)

148 34

(.63%)

13.2

(24.1)

25 104.9

(251.2)

25

How many shoppers read EULAs? How many shoppers read EULAs? 49/40,697 = 49/40,697 = 0.12%0.12%

At most 6/3,534 = 0.17%At most 6/3,534 = 0.17%

Is 1 in 1000 enough to create an IM?Is 1 in 1000 enough to create an IM? How could real firms even know they’re losing 0.12% of How could real firms even know they’re losing 0.12% of

customers (which assumes every single reader walks customers (which assumes every single reader walks away)?away)?

Back of envelope calculation (see paper) suggests that Back of envelope calculation (see paper) suggests that MC of good M&S terms is at least 100x greater than MBMC of good M&S terms is at least 100x greater than MB

Does disclosure help? Does disclosure help?

More disclosure = more readership? More disclosure = more readership? Again, surprisingly little evidence yetAgain, surprisingly little evidence yet

Marotta-Wurgler (2011; 2012) measures Marotta-Wurgler (2011; 2012) measures readership as a function of disclosurereadership as a function of disclosure Check whether shoppers click on (“read”) the EULA Check whether shoppers click on (“read”) the EULA at at

a higher rate a higher rate when EULA is more prominently when EULA is more prominently discloseddisclosed

DataData

Similar sample to Bakos et al. Similar sample to Bakos et al.

For each company website, we measure EULA For each company website, we measure EULA accessibilityaccessibility # of clicks from “natural path to purchase”# of clicks from “natural path to purchase” Ranges from 0 to 6 Ranges from 0 to 6 0; 0.5 is a clickwrap, >0.5 is a browsewrap0; 0.5 is a clickwrap, >0.5 is a browsewrap

Accessibility and readershipAccessibility and readership

Clickwraps v. BrowsewrapsClickwraps v. Browsewraps

When EULAs are made more accessible, they When EULAs are made more accessible, they are indeed several times more likely to be readare indeed several times more likely to be read But even with very prominent disclosure, readership But even with very prominent disclosure, readership

remains less than 0.5%remains less than 0.5% One out of every 200 shoppers even glances at the EULA, let One out of every 200 shoppers even glances at the EULA, let

alone understands it, or reacts to italone understands it, or reacts to it Results are robust Results are robust

People Don’t Read Clickwraps, EitherPeople Don’t Read Clickwraps, Either

0.23% click on hyperlinks of EULAs that they are 0.23% click on hyperlinks of EULAs that they are forced to acknowledge exist, but require an extra forced to acknowledge exist, but require an extra click to seeclick to see

Median time spend on checkout pages with text Median time spend on checkout pages with text box EULAs is at most 94 secondsbox EULAs is at most 94 seconds

Bottom line: Even with required assent, almost Bottom line: Even with required assent, almost nobody reads fine printnobody reads fine print And .23% still not enough to constitute an IM (20%)And .23% still not enough to constitute an IM (20%)

Assent and ModificationAssent and Modification

Do contracts change over time?Do contracts change over time? Sub-sample of EULAs from 264 firms, 2003 and 2010 Sub-sample of EULAs from 264 firms, 2003 and 2010

(Marotta-Wurgler & Taylor 2013)(Marotta-Wurgler & Taylor 2013)

For each EULA, we measure in 2003 and 2010For each EULA, we measure in 2003 and 2010 # of words# of words Flesch-Kinkaid readability scoresFlesch-Kinkaid readability scores Relative Pro-Seller/Pro-Buyer bias for 32 termsRelative Pro-Seller/Pro-Buyer bias for 32 terms

FindingsFindings

39% had at least one material change39% had at least one material change

Contracts got longerContracts got longer 1,517 words in 20031,517 words in 2003 1,938 words in 20101,938 words in 2010 Remain hard to read: FK Score= 33Remain hard to read: FK Score= 33

• Consumers are being asked to read a long contract that has Consumers are being asked to read a long contract that has the same readability score as a scientific journal articlethe same readability score as a scientific journal article

On average, change favored sellersOn average, change favored sellers

Another Example: Privacy PoliciesAnother Example: Privacy Policies

248 PPs from six different markets (Marotta-Wurgler 248 PPs from six different markets (Marotta-Wurgler 2014)2014) Graded on 69 dimensions; weekly snapshots (2009-2013)Graded on 69 dimensions; weekly snapshots (2009-2013)

On contract changesOn contract changes:: ““Change of Terms” clauses appear 86% of time, and only Change of Terms” clauses appear 86% of time, and only

9% will email users informing such changes9% will email users informing such changes Only 10% will ask for explicit assent to new termOnly 10% will ask for explicit assent to new term

Do PPs Change Over Time?Do PPs Change Over Time?

59% had at least one material change59% had at least one material change Some changed frequently, up to 30 times since 2009Some changed frequently, up to 30 times since 2009 On average, there are about 2 changes a year (with increasing On average, there are about 2 changes a year (with increasing

frequency)frequency)

Can PPs be easily understood? (more in paper)Can PPs be easily understood? (more in paper) Seems unlikely. Most include vague and contradictory termsSeems unlikely. Most include vague and contradictory terms

97% condition statements with “may,” “might” (~20 avg.)97% condition statements with “may,” “might” (~20 avg.) Words such as “affiliates.” “third parties” defined only 7% of timesWords such as “affiliates.” “third parties” defined only 7% of times 64% include words such as “occasionally.” “from time to ime” (~2 avg.)64% include words such as “occasionally.” “from time to ime” (~2 avg.)

ConclusionConclusion Requiring disclosure seems sensible, but unlikely to Requiring disclosure seems sensible, but unlikely to

make any difference make any difference (at least in software market online)(at least in software market online) Hardly anyone reads EULAs, regardless of disclosureHardly anyone reads EULAs, regardless of disclosure For consumers, what is costly is reading, not accessFor consumers, what is costly is reading, not access Even if consumers (or experts) read, unclear they would understandEven if consumers (or experts) read, unclear they would understand

Constantly changingConstantly changing Complexity, length, internal contradictionsComplexity, length, internal contradictions

For policy, now what? For policy, now what? Tinker with disclosures (“smart,” “just in time”)Tinker with disclosures (“smart,” “just in time”) Minimum standards? Minimum standards? Default rules (in privacy)?Default rules (in privacy)? Do Nothing? Do Nothing?