Should Antitrust Survive Behavioral Economics?

Abstract

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. The virtues of competition within the neoclassical framework are many. The competitive equilibrium generates both productive efficiency 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.

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, preexisting 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?

Keywords: Behavioral Antitrust, Behavioral Law and Economics, Efficiency, Welfare, Rationality, Judgment, Choice