How Can Competition Agencies Use Behavioral Economics?

• Author: Maurice E. Stucke
• Published date: 01 December 2014
• Date: 01 December 2014
• DOI: http://doi.org/10.1177/0003603X1405900402
• Subject Matter: Article

THE ANTITRUST BUL L E T I N :Vol. 59, N o. 4/Winte r 2014 :695

How can competition agencies

use behavioral economics?

BYMAURICE E. STUCK E*

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).

I. INTRODUCTION

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

1PETE LUNN, REGULATORYPOLICY AND BEHAVIORAL ECONOMICS 12 (2014).

2Id.

3GOV.UK, https://www.gov.uk/government/organisations/behavioural

-insights-team.

4Kristine Erta et al., Applying Behavioural Economics at the Financial Con-

duct Authority (Financial ConductAuthority,Occasional Paper No.1, Apr. 2013),

http://www.fca.org.uk/static/documents/occasional-papers/occasional

-paper-1.pdf.

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 e.gov/bl 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

.whitehouse.gov/sites/default/files/omb/memoranda/2013/m-13-17.pdf.

9OECD, SEC RETARY-GENERAL’SSTRATEG IC ORIENTATIONS F OR 2011 AND

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), http://www.ftc.gov/speeches

/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,

2010), http://www.ftc.gov/speeches/rosch/100106financial-products.pdf.