The lost-volume seller problem is a very confusing one that has been incorrectly analyzed by numerous commentators and has been a constant source of confusion to the courts. The issue is this: If a buyer breaches a purchase contract for a manufactured item and the seller subsequently resells the product at the same price, has the seller suffered any damage, and if so, should he be compensated for it? In cases in which the seller is a retailer, the conclusion is (a) yes, the seller does suffer damages, (b) the damages are the market price of the service of selling the goods, (c) the market price of selling is approximately the gross margin, (d) even though the damages are incurred, full compensation would probably be inefficient, and (e) the law ought to encourage the parties to use nonrefundable deposits as liquidated damages. This argument is developed in Selection [4.1], one of the few papers in this book that considers contracts between businessmen and consumers.

While that argument is of interest in its own right, it serves as a useful introduction to the lost-volume problem that arises in contracts between business firms. The line of argument is somewhat different, but the basic conclusion remains the same: Although the damages are real, the law should deny recovery and facilitate customized remedies via liquidated damages clauses. The treatment of the lost-volume problem in the nonretail case is explored in the notes and questions at the end of Part IV.