Monday, December 6, 2010

The Misguided Imposition of Behavioral Economics on Antitrust

Excerpts via Truth on the Market.
Behavioral law and economics has arisen to international prominence; between Cass Sunstein’s appointment to head the Office of Information and Regulatory Affairs the United Kingdom’s appointment of a “nudge” bureau, behavioralism has enjoyed a meteoric impact on policymakers.  Thus far, behavioral economists have almost exclusively focused on the myriad foibles or purported cognitive errors which hamper consumer decision-making.  These traits include “optimism bias,” the tendency for an individual to underestimate the likelihood of negative results from their behavior, and hyperbolic discounting, where individuals reveal time-inconsistent preferences (often by over-valuing immediate consumption, at least as measured against some third party’s valuation).
Antitrust-relevant models of firm behavior necessarily depend on examining strategic behavior between incumbent and entrant firms.  Timely and sufficient entry can dissipate monopoly profits, destabilize cartels, and ameliorate the anticompetitive effects of mergers.  Any potential attribution of behavioralist biases to firm behavior must therefore similarly account for the presence of behavioralist biases among both incumbents and entrants.  The typical application of behavioral economics to antitrust is a straightforward enterprise: behavioralists assume – without proving – that incumbent firms are irrational, that this irrationality necessarily leads to more predation than rational choice models would predict, and entrants, potential or actual, do not compete away rents from this predation.  I summarize these three assumptions as the “Naïve Model” of competition.
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