How Can Competition Agencies Use Behavioral Economics?

Published date01 December 2014
Date01 December 2014
Subject MatterArticle
THE ANTITRUST BUL L E T I N :Vol. 59, N o. 4/Winte r 2014 :695
How can competition agencies
use behavioral economics?
Behavioral economics is both mainstream and timely. The financial
crisis r aised im portan t issues o f market f ailure , weak regu lation ,
moral hazard, and our poor understanding of how key markets
operate. One therefore expects lawyers and economists to bring the
current economic thinking to competition agencies, some of which
are already taking note. How should the competition agencies
respond? This article examines how competition agencies can
consider behavioral economics’ implications on four levels: first as a
gap filler, that is,to help explain “real world” evidencethat neoclassical
economic theory cannot explain; second, to assess critically the
assumptions of s pecific polic ies, such as merger rev iew and cartel
prosecutions; third, to revisit fundamental questions, such as what is
competition and what are the goals of competit ion law; and fourth,
to a sse ss h ow b eha vi or al ec on om ics w il l af fec t th e de gre e of
convergence of competition law among the over 100 jurisdictions
with competition laws today.
KEY WORDS:behavioral economics, antitrust, competition, cartels, mergers
© 2014by Federal Legal Publications, Inc.
* Associate Professor, University of Tennessee; Senior Fellow, American
Antitrust Institute.
AUTHOR’S NOTE: I wish to thank for their helpful comments Stephen Martin, Roger
Noll, Sten Nyberg, Thomas Rosch, Gregory Stein, Henry Su, Spencer Weber Waller,
and the participants of the American Antitrust Institute’s 2013 Symposium,
Antitrust as an Interdisciplinary Field: Insights from Business Strategy and
Research.A version of thispaper was preparedfor, and presented at, the Organisationfor
Economic Co-operation and Development’s Hearing on Competition and Behavioural
Economics, Paris, France (June 2012).
Behavioral ec onomics, an Organisation for Ec onomic Co-ope ration
and Development (OECD) book recently noted, “has been swept into
the mainstream with surprising speed”1and is influencing policy in a
number of countries. “Economic regulators in several countries” Pete
Lunn observed, “have also begun to recruit behavioural economists
to assist with regulatory delivery, particularly in the context of mar-
ket studies aimed at ensuring consumer protection and effective com-
petition.”2The U.K.’s Behavioural Insights Team, also known as the
Nudge Unit, “applies insights from academic research in behavioural
economics and psychology to public policy and services.”3The U.K.’s
Financial Condu ct Authority (FCA )4and U.S. C onsumer Financial
Protection Bureau5are discussing how market forces will not always
reduce, and at times will exploit, consumers’ behavioral biases.6
Indeed, the belief is that consumers’ behavioral biases “can lead firms
to compete in ways that are not in the interests of consumers.”7Presi-
696 :THE ANT I T R U S T BULLETIN:Vol. 59, No. 4/Winter 2014
4Kristine Erta et al., Applying Behavioural Economics at the Financial Con-
duct Authority (Financial ConductAuthority,Occasional Paper No.1, Apr. 2013),
5Prop osed G uide lin es for E nsu ring a nd Ma ximi zing t he Qu alit y,
Objectivity, Utility, and Integrity of Information Disseminated by the Bureau
of Consumer Financial Protection, 77 Fed. Reg. 46069 (Aug. 2, 2012) (inquir-
ing “[w] hat resear ch in behav ioral ec onomic s or other ac ademic f ields—
published or still in process—provides insight into financial education
approaches tha t can help consu mers achieve t heir own financ ial goals?”) ;
Irene Skricki & Dubis Correal, CFPB, Our Progress on Finan cial Education
(Mar. 25, 2013) , http:// www.consume rfinanc og/our- progress- on
-financial-education/ (CFPB “developing and testing new financial education
strategies to build on insights from the field of behavioral psychology” and
working “on an initiative to help consumers overcome common financial
challenges they face on a regular basis”).
6Dee Pridgen, Sea Changes i n Consumer Fin ancial Prote ction: Stron ger
Agency and Stronger Laws, 13 WYO. L. REV.405, 408 (2013).
dent Obama in 2013 asked his Cabinet “to carry out an aggressive
management agenda for his second term that delivers a smarter, more
innovative, and more accountable government for citizens,” which
includes “[a]pplying behavioral insights to improve results and lower
costs in direct operations.”8
The economics literature some time ago moved beyond neoclassi-
cal economic theory’s assumptions of perfectly rational market partic-
ipants who pursue with willpower their economic self-interest. Over
the past twenty years, the economic literature has increasingly recog-
nized and measured how (1) willpower is imperfect, (2) biases and
heuristics can affect decision making, and (3) people will incur costs
to punish unfair behavior and care about treating others, and being
treated, fairly. The economic crisis raised important issues of market
failure, weak regulation, moral hazard, and our lack of understanding
about how many markets actuall y operate . The OECD no ted how
“the worst financial and economic crisis in our lifetime”9has
prompted policy makers to ask: “Are our economic theories, our eco-
nomic models, and our assumptions still valid?”10
With behavioral economics’ rapid ascent, one expects lawyers and
economists to bring the current economic thinking to the competition
agencies and courts. Indeed competition authorities are already taking
note. Some officials at the Federal Trade Commission (the FTC),11 Euro-
BE H AV I O R A L EC O N O M I C S :697
7Erta et al., supra note 4, at 4.
8Memorandum to the Heads of U.S. Departments and Agencies from
Sylvia M. Burwell, Director, Office of Management and Budget, Next Steps in
the Evidence and Innovation Agenda (July 26, 2013), available at http://www
BEYOND 2 (May 2011).
10 Id.
11 See, e.g., J. Thomas Rosch, Comm’r, Fed. Trade Comm’n, Behavioral
Economics: Observations Re garding Issues that Lie Ahead, Remarks at th e
Vienna Competition Conference (June 9, 2010),
/rosch/100609viennaremarks.pdf; J. Thomas Rosch, Comm’r, Fed. Trade
Comm’n, Managing Irrationality: Some Observations on Behavioral Econom-
ics and the Creation of the Consumer Financial Protection Agency, Remarks
at the Conference on the Regulation of Consumer Financial Products (Jan. 6,

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