Behavioural economics, antitrust and regulation

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...

Rationality

The Origin of Wealth, Eric D Beinhocker, 2006, p116-119 “Imagine you walk into your grocery store and see some tomatoes… You have well-defined preferences for tomatoes compared with everything else you could possibly buy in the world, including bread, milk, and a vacation in Spain. Furthermore, you have well-defined preferences for everything you could possibly buy at any point in the future, and since the future is uncertain, you have assigned probabilities to those potential purchases. For example, I believe that there is a 23 percent chance that in two years, the shelf in my kitchen will come loose and I will need to pay $1.20 to buy some bolts to fix it. The discounted present value of that $1.20 is about $1.00, multiplied by a 23 percent probability, equals an expected value of twenty-three cents for possible future repairs, which I must trade off with my potential purchase of tomatoes today, along with all of my other potential purchases in my life- time. In the Traditional Economics model, all these well-defined preferences are also ordered very logically. So if I prefer tomatoes to carrots, and prefer carrots to green beans, I will always take the tomatoes over the green beans. Likewise, if I prefer tomatoes to carrots, I won’t suddenly go for the carrots simply because I saw some green beans. Traditional Economics also assumes that you know exactly what your budget is for spending on tomatoes. To calculate this budget, you must have fully formed expectations of your future earnings over your entire lifetime and have optimized your current budget on the basis of that knowledge. In...