Consumer Behavior and Disclosure in Online Contracts Florencia Marotta-Wurgler New York University School of Law Conference on Behavioral Industrial Organization and Consumer Protection, UCL October 18, 2014

Internet Commerce Significant and growing every year $75 billion for second quarter of 2014 in US (15% increase from 2013) Most consumer transactions and services online (and off) are governed by fine print EULAs, TOU, Privacy Policies, TOS Clickwraps, browsewraps What happens if nobody reads it?

Some Evidence Few people read standard form contracts Increasing disclosure barely changes the rate of readership Even requiring assent fails to draw attention to SFC terms Contracts are complex and change frequently, further complicating assent 3

Few people read SFCs Bakos, Marotta-Wurgler & Trossen (2014) look for an “informed minority” in a real market Idea is that if enough readers are sensitive to terms, competition forces sellers to offer reasonable ones Often assumed, invoked by courts, but never tested Market is online shopping for software EULAs are quintessential modern form contracts Comparison shopping is easy online—if informed minority exists, should be here I

Empirical Framework Shoppers who read Informed Minority = All shoppers The informed minority will be the fraction of shoppers who read to all shoppers

Data All visits by 40,091 households to 66 software companies for one month 56 retail; 10 freeware; with non-“forced” EULAs Visits defined as series of URLs and time on each Demographic information for each household Contract, firm, and product information “Readers” are those who click on EULA page and stay for at least one second

EULA Access: Results 7

How many shoppers read EULAs? 49/40,697 = 0.12% At most 6/3,534 = 0.17% Is 1 in 1000 enough to create an IM? How could real firms even know they’re losing 0.12% of customers (which assumes every single reader walks away)? Back of envelope calculation (see paper) suggests that MC of good M&S terms is at least 100x greater than MB 8

Does disclosure help? More disclosure = more readership? Again, surprisingly little evidence yet Marotta-Wurgler (2011; 2012) measures readership as a function of disclosure Check whether shoppers click on (“read”) the EULA at a higher rate when EULA is more prominently disclosed

Data Similar sample to Bakos et al. For each company website, we measure EULA accessibility # of clicks from “natural path to purchase” Ranges from 0 to 6 0; 0.5 is a clickwrap, >0.5 is a browsewrap

Accessibility and readership

Clickwraps v. Browsewraps When EULAs are made more accessible, they are indeed several times more likely to be read But even with very prominent disclosure, readership remains less than 0.5% One out of every 200 shoppers even glances at the EULA, let alone understands it, or reacts to it Results are robust

People Don’t Read Clickwraps, Either 0.23% click on hyperlinks of EULAs that they are forced to acknowledge exist, but require an extra click to see Median time spend on checkout pages with text box EULAs is at most 94 seconds Bottom line: Even with required assent, almost nobody reads fine print And .23% still not enough to constitute an IM (20%)

Assent and Modification Do contracts change over time? Sub-sample of EULAs from 264 firms, 2003 and 2010 (Marotta-Wurgler & Taylor 2013) For each EULA, we measure in 2003 and 2010 # of words Flesch-Kinkaid readability scores Relative Pro-Seller/Pro-Buyer bias for 32 terms

Findings 39% had at least one material change Contracts got longer 1,517 words in 2003 1,938 words in 2010 Remain hard to read: FK Score= 33 Consumers are being asked to read a long contract that has the same readability score as a scientific journal article On average, change favored sellers

Another Example: Privacy Policies 248 PPs from six different markets (Marotta-Wurgler 2014) Graded on 69 dimensions; weekly snapshots (2009-2013) On contract changes: “Change of Terms” clauses appear 86% of time, and only 9% will email users informing such changes Only 10% will ask for explicit assent to new term

Do PPs Change Over Time? 59% had at least one material change Some changed frequently, up to 30 times since 2009 On average, there are about 2 changes a year (with increasing frequency) Can PPs be easily understood? (more in paper) Seems unlikely. Most include vague and contradictory terms 97% condition statements with “may,” “might” (~20 avg.) Words such as “affiliates.” “third parties” defined only 7% of times 64% include words such as “occasionally.” “from time to ime” (~2 avg.)

Conclusion Requiring disclosure seems sensible, but unlikely to make any difference (at least in software market online) Hardly anyone reads EULAs, regardless of disclosure For consumers, what is costly is reading, not access Even if consumers (or experts) read, unclear they would understand Constantly changing Complexity, length, internal contradictions For policy, now what? Tinker with disclosures (“smart,” “just in time”) Minimum standards? Default rules (in privacy)? Do Nothing? W