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Suppose that a customer agrees to buy a boat and before it is delivered, he reneges. The dealer subsequently resells the boat to another customer at the same price. Has the seller suffered damages (aside from incidental damages) and, if so, should he be compensated? This question, dubbed the lost-volume seller problem, has been the subject of considerable legal analysis, usually in the context of explicating section 2-708(2) of the Uniform Commercial Code (U.C.C.). There have been a number of attempts to apply economic analysis to this difficult question, the most recent by Professors Goetz and Scott. Unfortunately, the economic analysis thus far employed has not helped. The analysis has fundamentally misrepresented the problem. While the Goetz-Scott policy conclusion is quite probably correct, the path to that conclusion is not.

This Article presents an alternative analysis that better captures the economics of the problem. This analysis concerns those issues that logically precede questions of what the rule ought to be or how section 2-708(2) ought to be applied. The focus is on how the problem should be analyzed rather than on what the correct rule ought to be. There will be room for reasonable people to disagree on the rule's content and on its application.

The central error of the Goetz-Scott analysis (and the others) is the failure to recognize explicitly that the seller in our boat example is a retailer. Once this point is recognized and models are chosen accordingly, the analysis becomes quite simple. That analysis will be developed in Parts II and III. First, however, this Article presents a simplified summary of the Goetz-Scott analysis.


Law | Law and Economics