Is Bounded Rationality in Entry Decisions Necessarily Bad for Social Welfare?

• Published date: 01 December 2016
• Date: 01 December 2016
• DOI: 10.1177/0003603X16676141

Article
The Antitrust Bulletin
2016, Vol. 61(4) 541-545
Is Bounded Rationality in Entry
ª The Author(s) 2016
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Decisions Necessarily Bad for
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DOI: 10.1177/0003603X16676141
Social Welfare?
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Michal S. Gal*
Abstract
In the article Boundedly Rational Entrepreneurs and Antitrust, Professor Tor provides an excellent
overview of the effects of bounded rationality on the behavior of entrepreneurs in the marketplace. In
this short note, I offer some observations on the article. In particular, it suggests several additional
parameters that might be worth exploring before we can reach a conclusion about the role that
bounded rationality plays in economically irrational entry decisions. It also suggests some factors that
should be weighed before determining whether irrational entry is socially harmful. Finally, the note
provides several observations with regard to regulation, including the effects of algorithmic applica-
tions on bounded rationality decisions by entrepreneurs.
Keywords
antitrust, competition, competition law, innovation, rationality, bounded rationality
I. Introduction
In the article Boundedly Rational Entrepreneurs and Antitrust, Professor Tor provides an excellent
overview of the effects of bounded rationality on the behavior of entrepreneurs in the marketplace. In
particular, he uses the recognized behavioral economics biases concerning overconfident beliefs and
risk-seeking preferences in order to explain the excessively risky new entry that is prevalent in the
market. This overview offers us a new and illuminating way, beyond our conventional assumptions, of
recognizing the motivations behind market entry. Professor Tor then focuses on the social welfare
effects of such boundedly rational entry. He argues that while irrational entrants generate social costs,
excessively risky entry also brings about important social benefits, primarily due to its association with
innovation. The article then connects some of these insights to the realm of antitrust and offers several
suggestions for its application. In this short note, I offer some observations that follow the three parts of
the article.
*University of Haifa Faculty of Law, Haifa, Israel
Corresponding Author:
Michal S. Gal, University of Haifa Faculty of Law, 199 Aba Khoushy Ave., Mount Carmel, Haifa, 3498838, Israel.
Email: mgalresearch@gmail.com

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The Antitrust Bulletin 61(4)
II. The Extent of Applicability of the Studies Surveyed
The starting point of the article is that ‘‘[t]he empirical evidence on entry suggests . . . that many
entrepreneurs attempt entry in circumstances that would have led them to avoid doing so if they were
perfectly rational.’’1 The article seeks to explain this conduct based on the behavioral biases of over-
confident beliefs and risk-seeking preferences. To do so, it surveys an abundance of studies on the
existence of such biases in market decisions. I would like to suggest, however, that there are several
additional parameters that might be worth exploring before we reach a final conclusion about the
motivations behind economically irrational entry decisions.
First, all the...