by Kevin Coates | Nov 8, 2009 | Economics
What follows are some initial thoughts on how behavioural economics might affect antitrust and regulation. They are not particularly advanced, but some points of the points raised I have not seen elsewhere (even when I remember to search for “behavioral economics” and not just “behavioural economics”). Wikipedia has a good general introduction to behavioural economics, and the European Commission has also published a short overview for the press. (Disclosure: the European Commission is my employer, even though I am on secondment to NYU at the moment. I was not involved in the preparation of that document. All opinions are my own, etc…) There is understandable reluctance by economists to transpose conclusions about the behaviour of individuals to the behaviour of firms: arguably much of the analysis carried out by firms before they decide on a strategy is precisely to widen the bounds of their rationality, avoiding the conceptual limits of individuals. This sidesteps the question, though, of what the implications of behavioural economics should be when an antitrust analysis depends on consumer behaviour. The Microsoft bundling cases in the US and the EU depended in part on how consumers would react to the bundling into Windows of Internet Explorer and Media Player. Given that behavioural economics suggests that consumers are influenced by “defaults” to a greater extent than traditional (rational market) economics would predict, then the negative effects of the bundling on consumer welfare would be greater than that which traditional economics would suggest. Other biases also might be relevant: availability bias – where individuals are disproportionately influenced by highly visible or memorable factors – might suggest that incumbency...