Should Antitrust Survive Behavioral Economics?

In recent years behavioral antitrust has become a focus of interest and heated debate, evincing an outpour of commentary from scholars, policy makers, and the antitrust agencies.  Behavioral antitrust seeks to inform competition law by drawing on empirical behavioral evidence that shows that market participants are boundedly rational.  These findings reveal that individuals systematically and predictably deviate from the theoretical economic model of perfect rationality in ways that matter for the interaction between consumers and producers in the market.  Commentators mostly debate the merits and demerits of behavioral antitrust as applied to the conduct of firms, which are the main subjects of the antitrust laws.  On the other hand, the legal implications of consumers’ bounded rationality, so far, have been debated primarily with respect to consumer protection and paternalistically-motivated regulation. Indeed, though even critics of the behavioral approach concede that consumers may be boundedly rational, the implications of consumers’ systematic deviations from rationality for antitrust law are yet to be thoroughly examined, a task to which my recent short CPI Antitrust Chronicle article‘Should Antitrust Survive Behavioral Economics?’ turns (a more detailed analysis of this issue is available in my chapter on Justifying Competition Law in the Face of Consumers’ Bounded Rationality).

The accepted economic foundation of antitrust law is straightforward: the neoclassical market model shows that perfect competition among firms maximizes productive and allocative efficiencies and social welfare. This model rests on several assumptions, including - as in neoclassical economics more generally - the notion that consumers are rational actors whose decisions always maximize their utility. To maximize the benefit from their consumption decisions, consumers choose the best mix of products they can obtain, at the best price available. The difference between the market price consumers pay and their valuation of the goods or services, ie the ‘consumer surplus’, is a measure of consumers’ welfare - the greater this surplus, the better off consumers are.

The virtues of competition within the neoclassical framework are many. Competitive equilibrium generates both productive and allocative efficiency, which maximize both consumer and total welfare. This attractive, welfare-maximizing property of the competitive equilibrium serves as the key economic justification for antitrust law. Like any regulatory regime that requires significant resources and imposes substantial social costs, antitrust law is economically justified only insofar as its benefits clearly exceed its costs. 

Nonetheless, a substantial body of empirical evidence shows that real consumers often fail to comport with the assumption of rationality that underlies the welfare benefits generated from the interaction between rational consumers and producers in competitive equilibrium. Specifically, these findings show that, in some cases, consumers hold biased beliefs about the value of products and services and, consequently, demand too much or too little of them. Further analysis shows that in the face of such distorted demand competition cannot maximize efficiency. In fact, under some circumstances, competition among sophisticated producers over the custom of boundedly rational consumers can even diminish efficiency. Beyond the problem of distorted demand, behavioral research also documents numerous instances in which consumers’ product choices are constructed or shaped ad-hoc, at the time of decision, in clear contrast to the assumption that consumers hold stable, pre-existing and orderly preferences. As a result, neither the demand generated by consumers whose preferences are malleable nor the resulting consumer surplus offer a meaningful measure of consumer welfare. Competition over such consumers, moreover, is typically unlikely to improve matters much and can even make consumers worse off. 

But if competition over boundedly rational consumers fails to maximize efficiency or advance consumer welfare what remains of the economic justification for antitrust’s mission of protecting competition? 

Avishalom Tor is Professor of Law at the University of Notre Dame, and Global Professor of Law at University of Haifa Faculty of Law.