Seminar 5: Behavioral Economics

The idea for this seminar is to discuss how far one might deploy tools of behavioral economics to antitrust issues. How might antitrust law be affected by the use of these methodologies?

Reading

Armstrong and Huck ‘Behavioural Economics and Antitrust’ in Blair and Sokol (eds.) The Oxford Handbook of International Antitrust Economics, Volume 1 (on-line copy available)

Bailey ‘Behavioral Economics and U.S. Antitrust Policy’ (2015) 47 Review of Industrial Organization 355

Bergh, R.J. Van den (2013). Behavioral Antitrust: Not Ready for the Main Stage. Journal of competition law & economics, 9 (1), 203-229

Further Reading

Hacker ‘More Behavioral vs. More Economic Approach: Explaining the Behavioral Divide Between the United States and the European Union’ (2016) 39 Hastings Int’l & Comp. L. Rev. 355 (this paper does not focus on antitrust, but I found the ideas interesting anyhow).

A scholar who has written clearly on behavioural economics is Avishalom Tor.

 

12 comments on “Seminar 5: Behavioral Economics

  1. Katrine Lillerud says:

    Reaction paragraph to readings in course ‘Competition law: Conservative or Progressive’
    Katrine Lillerud 7 November 2016
    Session 5: Behavioural economics

    Behavioral antitrust – why is it not ready for the main stage? (Bergh)
    According to Berge introducing behavioral antitrust evaluations into the current system is problematic because the main problem with the irrationality assumption is that there is no “common standard”, since types of behavior can differ across competitors and across markets. (p. 215) He does, however, seem to recognize that in some cases this line of arguments can enrich the antitrust assessment, as it could stimulate discussion and contribute to a “learning processes”, (p.228) which is crucial in a challenging policy field, like competition law. His main point seems to be that although behavioral antitrust may be useful for the assessment of competition law cases it may not replace the current “rational” mainstream antitrust economics line of thought.

    Behavioral economics is the only why to capture the full picture of a market (Bailey)
    Baily on the other hand finds that the economics currently used to assess antitrust cases comes to short, as it does not sufficiently capture the reality of the markets. Thus, the view is that one must, in order to understand a market behavior not only rely on economics, but ensure that the economic models employed fit the facts on the ground. The main argument to illustrate what behavioral economics would be more eloquent to use in the assessment of the market is that even a profit-focused company sometimes depart from strict profit maximization over the short or medium term and it is essential to understand how firms learn to maximize profits, and whether firms deviate from profit maximization in systematic and persistent ways. Furthermore, behavioral economics is also useful in assessments further down the chain in the market definitions as it is not to be ignored how consumers make choices to add to an antitrust analysis.

    In my view both authors do seem to agree that there is something to gain from behavioral economics, especially in order to capture the increasing complexities of the markets when assessing non conform behaviors.

  2. Alexandre Ruiz says:

    I must admit that I had high expectations for behavioral economics because it hits one of the vulnerable points of the Chicago School, which is the assumption of rationality of firms (See Posner (2007) Economic Analysis of Law, p. 15 onwards). Unfortunately, and answering to Giorgio’s questions (how far one might deploy tools of behavioural economics to antitrust issues and how might antitrust law be affected by the use of these methodologies) none of these three papers bring to the debate a signal of the potential usefulness of behavioral economics.

    As a general observation, all the three papers on behavioral economics and antitrust show that there is an ongoing ‘rational choice versus irrational choice theory’ debate. The latter challenges the assumptions of the former, so firms are not always perfect profit maximizers. In this sense, Armstrong and Huck’s article provides several examples that show that sometimes firms imitate successful peers (p. 6) or follow vengeful motivations in their performance (p. 9). This different perspective may also change antitrust enforcement, as it is suggested by the example of non-profit enterprises provided by Bailey (p. 361 onwards). What is curious is that these authors have a different approach towards the role of behavioral economics. Whereas Bailey seems to propose an alternative to conventional economic models, Van den Bergh is suggesting a complement to Post-Chicago theories (p. 228).

    However, I find a common problem in Bailey’s and in Armstrong and Huck’s paper, which is that they do not provide tools to solve antitrust problems, but more questions. This is much in line with what Van den Bergh says. Let me explain this with the following figure. The dividing line represents the moment of collusion, so we can differentiate when antitrust law must intervene. The Box A is the ex ante stage previous to collusion, that is say, it represents the normal functioning of the market. Box B is after firms have colluded, and as an anti-competitive effect has been caused, antitrust law applies.

    COLLUSION
    |
    Box A (ex ante) | Box B (ex post)
    Why do firms collude? | What is the anti-competitive harm?
    How do firms behave? | How Antitrust law should be enforced?

    This is how I see it. In the figure above, rational choice theory puts its assumption in the ex ante stage (A) and provides answers for the ex post situation (B). Thus, mainstream economics assume that every firm is a rational, profit maximizer. There might be collusion, and if that collusion causes anti-competitive harm, antitrust law will prohibit it. Conversely, irrational choice theory neither puts an assumption in (A), nor provides tools for (B). It challenges the assumption that every firm is a profit maximizer, and says that, as they are irrational, the solutions in (B) provided by rational choice theory must change. But irrational choice theory does not say when and how antitrust law should intervene.

    See for instance the vengeful behaviour and the esprit de corps example mentioned by Armstrong and Huck (p. 8 onwards). They say that disadvantaged firms may act more aggressively against a leader firm, and that sometimes some firms may punish a different firm if that one deviates from the common policy. Furthermore, some cartels are based on a sense of camaraderie (which reminded me of Gillespie’s article on Vietnamese antitrust that we saw last year and where he shows that Vietnamese SME created cartels because of cultural reasons (2015: 953)). These arguments can explain why firms collude (A), but not what antitrust law must do in these cases (B). The same can be said with regard to other factors of irrationality, such as satisfactory profits, overoptimism, accounting anomalies, or uncertainty about rationality of rivals. These factors fit in (A), but there is nothing new in (B). In this sense, Armstrong and Huck say that ‘behavioral economics also sheds light on important market phenomena, and if antitrust policy is to reflect market realities, behavioural economics cannot be ignored’ (p. 22). One can easily agree with this. However, this does not provide any new antitrust tool. In fact, the core argument itself of irrational choice theory (firms are not always profit maximizers) may lead us into a peculiar kind of vicious circle. If we cannot be sure how firms behave (A), how can we know about the market reality? And how can we then adjust antitrust policy (B)? This is also illustrated by the examples of Bailey. Take the merger example on the Novazyme Pharmaceutical case (p. 363-364). She says that the FTC ‘recognized circumstances may dictate the need to depart from the strictly rational, profit-maximizing economic model in favor of fact-specific behavioural considerations’. One may agree, but where are the solutions for (B)?

    Another good example can be predatory pricing. As Van den Bergh says, US enforcers, influenced by the Chicago School, need great proof of recoupment of the losses suffered during predation (Matshushita and Brook case, p. 223). This view essentially assumes that predation is an irrational strategy, so there is no need for antitrust law intervention. Behavioral economics challenges this Chicagoan argument, and argues that the success of predation may change depending on the irrationality of the incumbent and the newcomer. Here, Van den Bergh says that it may happen that the incumbent is overoptimistic, so its predation policy, instead of eliminating competitors, is attracting new entrants. And, as he recognizes, ‘[i]f an irrational incumbent interacts with an irrational entrant, there will be no clear antitrust policy implications’ (p. 224). Thus, this example confirms that irrational choice theory may provide new answers to the questions in (A), but it only arises more questions in (B).

    To sum up, I think that whereas rational choice theory provides tools and answers, irrational choice theory only provides more questions. From this perspective, behavioural economics fail to build a reliable normative legal theory that explains how antitrust law ought to be.

  3. Maria de la Cuesta says:

    The readings for today discuss the contribution of Behavioral Economics (BE) to antitrust. Armstrong and Huck try to offer a number of reasons explaining why the behavior of firms may deviate from rational decision-making, suggesting that a deeper look into them may change the result of certain antitrust decisions, making for a more strict application of antitrust laws. Bailey, in this same line, discusses the impact of BE in a number of actual decisions, and finally, Bergh questions the contribution of this kind of analysis to the enforcement of antitrust.
    The contribution of BE has been especially important in the field of consumer protection, offering consistent data on how consumers deviate from the assumption of the rational economic actor. In practice, BE insights have justified rules such as cooling-off periods in distance selling. However, understanding that the decisions of consumers may be biased does not equal to saying that all consumers are biased in the same direction or in the same degree. Rather, some authors have seen consumer protection law as a way of elevating the presumption of the weakness of consumers as contracting parties to a legal status of protection. When it comes to the behavior of firms, BE may show evidence that some firms, especially micro-enterprises, face in many cases cognitive biases similar to those of consumers. However, arguing for a limitation of freedom of contract by elevating a certain category of firms, even the smallest ones, to a similar protective status, remains much contested, because the presumption of rationality is harder to dismantle in the business-to-business world.
    BE faces similar limitations in the field of antitrust law, if we agree with van den Bergh that antitrust deals with the behavior of firms, and not of consumers. BE has not yet succeeded in fulfilling its promises. It has failed to provide ‘all the relevant facts and data’, as Bailey puts it, to establish the link between what appears to be a mere collection of anecdotes on the bounded rationality of firms and the need for the complete dismissal of traditional economic models. For this reason, I tend to agree with Bergh’s position on the inconclusiveness or ambiguity of BE and its capacity to change the way antitrust is enforced. Sure BE helps shed new light on the ways firms behave, but in this task, it has only come to modulate – not replace – traditional economic models.
    In some way, I think this debate is another way of echoing that of the objectives of antitrust and the room for non-efficiency considerations (and I think that this debate is not exclusive of antitrust, but also of contract, such as the discussion on the protection of small business through contract tends to show: to what extent can fairness considerations modulate freedom of contract?). I see this parallelism more clearly in Bailey’s paper, where she mentions a number of cases in which the courts or defendants discussed the non-profit nature of the firm and the possibility of achieving objectives different from profit-maximization. Is it not possible that those cases could have been framed in a European context in terms of public policy considerations in the application of antitrust rules? And if this is the case, wouldn’t BE be a way of avoiding the complexities of balancing ‘incommensurate’claims?

  4. Anna Nowak says:

    I agree that the behavioral economics should not be ignored by antitrust and, of course, that firms’ actions are not in 100% motivated by profit-maximisation – it is quite obvious, no need to prove that. I also agree with Van den Bergh that excessive optimism is not a good idea. One should be cautious until the sufficient theoretical framework is established, because for now it seems that apart from some obvious cases, a lot of abuse and manipulation could be imagined. I also get the impression that the more “progressive” competition law exchanges legal certainty for getting closer to “the objective truth” but I am not saying this is a bad thing, rather an interesting one.

    The papers made me think about another thing. The inclusion of behavioral economics in the assessment of antitrust cases would have consequences going beyond the antitrust field, at least in the EU Law. For example in state aid, it could impact the private market operator test used to assess the “advantage” criterion of the measure. In this context, the behaviour (indeed) of a state is compared with the one of a rationally acting private market operator – the test is based on the reasons for, not on the effects of the action. Admitting the “irrationality” of the market operator, more or less occasional, would undermine the adopted standard of assessment. It could make Member States resort to a theoretical example of a market operator pursuing objectives different than profit maximization or even to the argument that the State acted irrationally, just like a private operator could in such circumstances do. However, it seems that behavioral economics already got there since there is some critique of private market operator test (because indeed, the profit maximisation is not always the only objective, what the test does not take into account). Anyway, the recognition of the place of behavioral economics in antitrust, and thus competition law in general, could lead to the unsuitability of the test or at least to its considerable complication.

    I am not saying that it is the reason to avoid behavioral economics but just that it would, at least in the EU, influence also other types of assessment. Of course, if the behavioral economics ensures a more conscious and accurate assessment of undertakings’ actions while its potential is not outweighed by the risk of errors, why wouldn’t it be included in the case analysis.

  5. Magdalen Reeder says:

    Armstrong and Huck identify an array of manager and firm incentives that might not be maximizing profit. It reminded me that Easterbrook suggested firms often try solutions until something works, without a good understanding of why the solution worked. This was a justification for the Chicago School filters in the first place. Is it worth it in terms of benefits to competition versus litigation costs to figure out what motivate these managers? Or as Armstrong and Huck suggest, are the policymakers and enforcers themselves using satisficing behavior and rigid rules because of behavioral biases that should be examined?

    To what extent is a company manager incentivized to merge because of his status as a short-term player who may have future career plans that don’t involve the company? In the first class we learned that often the acquiring company’s stock goes down after a merger, so it would seem that a manager judged on stock price would not want to merge. On the other hand, that could be because the price was going to go down anyway, and the (possibly overconfident or just calculating) manager hoped to forestall or mask it by merger, in which case he would be incentivized to merge. Or, the manager might be able to blame a lower stock price on an adjustment period and higher profits down the road when the efficiencies kick in, and leave for greener pastures before this is proven or disproven.

    Does behavioral economics substantially improve economic analysis? Could it make our antitrust laws more effective in promoting competition? As Van den Bergh points out, the number of potential biases seems overwhelming, especially when they could point in different directions. But, when used to describe fixed minimum retail prices, it seems helpful. However—in that example, behavioral economics is used to explain why behavior might be irrational. Is it necessary to know why? To what extent does behavioral antitrust help analyze reasons for conduct and to what extent does it help analyze effects of conduct? And how easy or hard is it to prove a behavioral reason for conduct, one way or another, especially when there are biases pointing in different directions?

    My main question from the Bailey article is similar to my questions above and just a slight rephrase of her own (and Van den Bergh’s): does behavioral economics give valuable enough information to be worth what seems like it must be a more fact intensive and expensive analysis? Should it be limited to the non-profit sector?

  6. Agnieszka Jabłonowska says:

    I have found all three articles describing the potential application of behavioural economics to antitrust law very much thought-provoking. So far I have only been familiar with behavioural studies conducted in the context of consumer law, and indeed both Armstrong/Huck, Bailey and Van den Bergh mention consumer law as an area which is potentially better fit for these (relatively) new insights. Although the authors of the discussed articles seem to represent a different degree of optimism as regards the usefulness of behavioural research for antitrust law, many of their arguments (both pro and contra) overlap. All of them acknowledge that individual biases cannot simply be extrapolated at the company level, although they seem to arrive at different conclusions about the importance of this factor. If my reading is correct, Van den Bergh is more sceptical in this respect than Armstrong/Huck, yet in both cases the assessments appears quite discretional, which may, in fact, reinforce the argument of the sceptics. All cited authors underline the need for further research to explore, inter alia, whether the findings of behavioural economists can be considered systematic, persistent and predictable. Armstrong/Huck provide a more extensive theoretical analysis using different economic models. Bailey and Van den Bergh, in turn, evaluate the potential of behavioural economics against the background of specific cases. Bailey suggests that the reasoning underlying the mainstream antitrust policy could be adjusted so as to better reflect the specific position of non-profit organisations. This hypothesis appears quite reasonable to me, although I wonder whether we really need to resort to behavioural economics to reach this conclusion. Some of the observations made in particular by Armstrong/Huck and Bailey may also suggest a certain potential for the application of behavioural economics to merger policy. This would remain in accordance with the claim of Mueller that most mergers are inefficient. In general, however, I have found the contribution of Van den Bergh most comprehensive and convincing. While the author acknowledges the potential of behavioural economics, he also points to concrete weaknesses of this field of research as it currently stands. Among other things, he mentions the issue of multiple biases affecting different parties and working in different directions simultaneously, which I have also intuitively regarded as troubling. As regards positive proposals, I have found the connection between behavioural economics and post-Chicago literature particularly intriguing and worth exploring in more detail.

  7. Zeynep Timocin Cantekin says:

    Reaction to Readings for Session 5: Behavioural Economics

    Bailey begins her argument by describing that currently the decision-making processes of the firms and the individuals (i.e. consumers) are defined using the sets of assumptions and concepts of traditional neoclassical economic theories, and the enforcement of the antitrust laws in the U.S. predominantly are reliant on these assumptions. These assumptions are (1) consumers are rational agents and always act rationally and (2) firms always make choices in order to maximize profits. However, she argues that both of these assumptions are not entirely correct in the sense that in real life, sometimes they fall short of the reality of choices made in the market. For example, even though according to a traditional analysis the rational and self-interested consumer should buy a product, he may irrationally refuse to purchase because he believes that the price is unfair. She also argues that there is empirical data showing that sometimes firms may deviate from traditional decision-making model of profit-maximisation for short-term goals of revenue maximisation or market share and obviously profit maximization is not always the sole purpose of all firms. Therefore, her main argument is that while the standard model works very well in most cases, there may be room to improve antitrust analyses by incorporating empirical data of behavioural economics for creating assumptions that complement real life cases. She then continues with giving 4 examples where behavioural assumptions were relied on in real life antitrust analyses. She concludes by arguing that the proximity of the assumptions on how consumers and firms make decisions to actual behaviour is fundamental to antitrust analyses as these assumptions are central to predicting price changes and potential anticompetitive effects. However, it only makes sense to consider an alternative model of decision-making for antitrust analysis in mergers when it is evident that firms systematically and persistently deviate from standard profit-maximising models under certain conditions and for certain goods and services.

    While thinking that the developments in behavioural economics is fundamental in portraying assumptions that are more real, I suspect that in terms of legal certainty neoclassical economics and the standard models might more predictable because they are simpler. For example, for a firm on the verge of merging with another firm, before taking a strategic step forward it is crucial to be able to calculate any costs or antitrust controversies, as they would affect the strategic choice. Firms should to be able to calculate risks associated with a merger, unpredicted risks could cause social cost. If the legal certainty is low, the capability of the firm to predict antitrust controversies will be low and costs of the strategic decision will rise. For this reason, I guess that the calculations based on non-standard models will be more complicated for the firms because (1) they seem to rely more on more sophisticated empirical data, which means that the firm will have more costs associated with obtaining this data (2) calculations will have to include peculiar cases, decreasing predictability of possible scenarios. Therefore, I believe that the impact on legal certainty should also be a factor in this discussion. To conclude I want to ask, from an economic perspective does the surplus in social welfare created by the antitrust analyses based on behavioural economics cover the costs created by lessening legal certainty? (That is if it indeed lessens.)

  8. Elena says:

    Bayle’s article presents an idea with which I very much agree: neoclassical economic theories embedded in current antitrust rules are too simplistic. Two are the main postulates of such paramount economic model. First, neoclassical theories assume that consumers are fully rational and they use all the information at their potential disposal in order maximize their utility. Secondly, these models presumes that firms base their strategy on one underlying objective: the maximization of profits. These assumptions give raise to some questions, for example, how can one get to know and measure consumer’s utility and how can one take due account of enterprises’ impact on economics when their final goal is not the maximization of profits?

    The simplified reality that those models present is instrumental to the ambitious objective of characterizing what is by definition uncharacterizable because of its own idiosyncratic nature: individuals and firm’s behavior. In order to overcome the practical obstacles, economics sciences tend to weed out any behavioral pattern which doesn’t adjust to the mainstream model. Economists acknowledge the existence of deviating patterns, however, they consider that it is almost anecdotal and therefore they do not take into account such patterns when rationalizing the model. By contrast, Bayle reckons that more attention should be paid to deviations from the standard behavior. He argues that antitrust policies should increasingly rely on behavioral economics, which could help to behold non-standard decision-making practices relevant to antitrust analysis. In his opinion, the application of behavioral economics to empirical evidence of actors practices could lead to alternative economic models.

    I endorse his view to the extent that it recognizes that economic axioms do not always correspond with the real world and that such fact should be further explored. However, these methodological tricks are not uncommon in other sciences and they are to some extent necessary to grasp actual facts. Every classification and logical appraisal of the crabbed reality resort to ultimate black boxes. For example, in physics, typically considered to be an exact science, one usually assumes that earth gravity acceleration is 9.8 m/s and friction is null in order to solve gravitation problems. In conclusion, it is arduous to strike a balance between what can be consistently comprehended and what needs to be inferred. In this regard, it may be the case of underpinning antitrust law with more philosophical reasoning.

  9. galyna says:

    Behavioural approach criticizes the rationality assumption and proposes the irrationality assumption instead.
    Roger van den Bergh argues that “irrational behavior by firms cannot be completely excluded”. I can agree with this statement. But I would require more elaborated explanations as to where and how we can draw a line between the application of rational and irrational assumption. In other words, if we switch to irrational assumption, does it mean that always firms and consumers are acting irrationally? If it is not a case, which instrument will allow us to make a distinction as to which assumption should be applied?
    On the p.212 the author indicated a long list of questions and then he stated that “one must investigate how irrationality is distributed across firms”. Yes, indeed, this should be examined. But questions as to how to do that and which tools should be used – still remain.
    On the p.222 the author argues that one should not assume irrationality of specific market participants, while ignore irrationality of other participants. I have doubts, however, whether it would be possible to make any analysis while assuming that each market participant is irrational? In this case, how we can establish in which regard each kind of participants are irrational and to what extend they are irrational? And, perhaps, their irrationality can be somehow rationalized?
    To sum up, the author’s contribution is mostly to demonstrate a lack of theoretical framework and flaws of behavioral economics rather to provide answers to cornerstone questions.
    In my opinion, the basic argument of the behavioral economics is right in itself, saying that behavior of market participants is not all the time rational. Nevertheless, for the moment it does not a framework for conducting a proper antitrust analysis, therefore it is highly doubtful how it can be used in practice.

  10. Alice says:

    These readings disturb me because if the behavioural economics proposition to integrate in economic analysis irrationality of economic agents is appealing, no clear guidance on how to integrate irrationality in antitrust analysis are given.
    To this extent, Van den Bergh’s idea that behavioural antitrust can enrich but may not replace mainstream antitrust economics appears sensible.
    The reluctance to integrate behavioural economics in antitrust analysis because it would lead to intrusive antitrust enforcement is unfounded since, as Armstrong and Huck show, behavioural reasoning may lead to less intervention. For example if the imitative behaviour of companies in a Cournot market or concerns for relative profits are taken into consideration, antitrust agencies may not intervene. Even if apparently there is collusion, the level of competition is actually high and in the long run prices will decrease. Behaviours considered as per se violations in current antitrust analysis may be considered as pro-competitive in a behavioural reasoning.
    It is possible that adopting behavioural economics principles in antitrust analysis actually modifies completely the current economic framework used in antitrust analysis and does not allow for a simple enrichment of current models as suggested by Van den Bergh.

  11. stavros says:

    Behavioral economics (BE) can or seek to achieve an incremental improvement of antitrust analysis. Even though BE started with a bold attack against the rationality assumption, this approach boils down to the bounded rationality thesis that merely relaxes the rationality assumption. In this sense the general contribution of BE is that they may help us integrate insights from psychology into antitrust economic analysis. This may lead to more accurate standards (less false positives and false negative) but make the standard harder to understand (create legal uncertainty) and apply (increase enforcement costs). Empirical analysis is needed to assess the accuracy of the BE models and measure their welfare enhancing properties as well as the social cost of their application.

    To me it is inaccurate to see BE as suggesting more intervention (as Ve De Bergh says) and thus being unequivocally progressive. The Armstrong and Huck piece clearly indicates that BE can both advocate in favor of more and less intervention according to their findings. For instance if Armstrong and Huck are right oligopoly should be less of a concern since when firms imitate the most profitable strategies or aim to maximize their relative profits they remain competitive. Thus, according to them the competitiveness of oligopolistic markets is understated. Similarly they seem to advocate in favor of relaxing the application of Art 101.1 TFEU when it comes to horizontal information exchange (p. 11 ‘the net impact of making it hard to communicate is that collusion is substantially more prevalent) even though their previous analysis is not as straightforward. On the contrary, their interesting analysis about satisficing behavior leads to more intensive intervention regarding collusions: the fact that a firm may not revise its strategy while it continues obtaining satisfactory profits means that even myopic adjustments may lead to collusive outcomes. This reinforces the theory of tacit collusion. Yet, it should be shown under which evidence could a competition authority or a court prove such an outcome. In this regard, Bailey tries to make the case that certain case law reflects behavioral assumptions (pp 12-18) , nonetheless I am not convinced that the Courts decided accordingly because of behavioral insights (if the Ivy league universities are not profit entities then competition rules do not apply; the fact that the Board of Directors of the two hospitals has demonstrated a genuine commitment is a moral element not a behavioral economics ground to permit the merger; the fact that the manager of Genzyme? Novazyme has two kids suffering from Pompe seems irrelevant from a behavioral antitrust perspective). So the question is still pending are these cases reflecting BE properly?

    In the normative level BE try to cast some doubt in the Articles of Faith and question the rationality assumption. Thus, it attacks the rational choice theory paradigm both from the side of irrational behavior and from the side of sub-optimal rational. However, rationality becomes so crucial only when efficiency becomes the ultimate goal of antitrust and the sole benchmark of the legality of a conduct. Leaving aside the broader normative discussion I would like to raise a naïve question: what kind of behavior does antitrust punish? Does it punish irrational behavior? Market forces alone are usually better in this task; competition is preferred as a system for organizing a market economy because it forces inefficient and/or irrational firms to exit the market. When the market cannot punish this irrational behavior then antitrust intervention is warranted seems to be the Chicagoan approach. The behavioral response would be that antitrust ought to punish irrational behavior as long as it is caused by a cognitive bias and market forces alone are insufficient to weed it out. So the existing paradigm is problematic only to the extent that it does not recognize certain behavior as irrational. In this sense the BE approach merely complements the Chicago paradigm. And even in this case it may be better to follow the Regulation path and set up clear and uncontestable rules that alleviate or eliminate the specific behavioral market failure. Consumer protection legislation constitutes a clear example of clear-cut rules that have benefited by insights from BE.

    BE offer one more crucial adjustment. If antitrust is interpreted as punishing sub-optimal rational behavior then competition authorities and courts may need to become regulators that are obliged to dictate welfare maximizing behavior. According to some, antitrust rules are not supposed to instruct companies on how to behave ex ante; they merely impose ex post narrow limits on commercial actors’ activity when they conduct their affairs in a manner that proves to be injuries for the consumers (Devlin, Antitrust as Regulation). Even though I do not ascribe to this minimalistic approach towards antitrust we should recognize how challenging is the said task. Nowadays, competition authorities are much better equipped and can impose various, tailor-made remedies, yet a case-by-case analysis is always needed. This practically means that BE insights should infiltrate in competition analysis after an ad hoc analysis and only if there are sufficient evidence regarding the accuracy of the model and its predictions. A necessary intermediate step could be conducting empirical research over the existing Chicagoan antitrust rules to assess their merit and demerit. For example BE can study modern RPM, the per se legality rule of tying or the no-recoupment test of predatory pricing to see whether the Chicago model’s predictions are inaccurate and if yes complement or fully reverse the analysis.

    The general conclusion to be reached from the above is that in the normative level BE does not constitute a rational choice paradigm shift just a paradigm adjustment. Nonetheless BE can some doubt to the Chicagoan Article of Faith (a) markets are robust when it comes to competition; (b) courts are infirm when it comes to policing competition (Crane Chicago, Post Chicago and NeoChicago p 24) even though currently they do not do so. BE give more emphasisgiven to shaking the first article and not as much the second. Armstrong and Huck though point towards this direction as well. In the positive law level Be does not have many exemplary antitrust cases so as to persuade us for their value. Be that as it may, BE could guide competition policy and inform competition analysis however the field is not yet mature and further work should be done.

  12. Rodrigo Vallejo says:

    Isn’t Hacker assuming what he wants to explain? According to the author the ‘behavioral divide’ between the US and the EU can be explained as a function two variables: (a) cultural trust in societal self-ordering forces; and (b) cognitive demands for collective collective social project. A high score in both variables would tend towards formal rationality models of human agency in legal concepts (i.e. Neoclassical Law & Economics). A low score would conversely tend towards material rationality models (i.e. Behavioral Law & Economics). In EU Law (a) has been historically low, but (b) has risen consistently as functional to the common market building project. This would explain EU’s resilient tendency towards a ‘more [neoclassical] economic approach’ in antitrust law and policy. While in the US (a) has been historically high, according to Hacker it has consistently declined “due to behavioral scholarship” (p. 35). Isn’t Hacker merging the cause and the consequence of the phenomenon we wants to “explain”? Moreover, Hacker just assumes that (b) in the US is low, rather swiftly discarding in footnote 110 the role of the ‘commerce clause’ jurisprudence. I think the paper (or Hackers research agenda) could gain more strength by trully engaging with that jurisprudence to prove his point.

    I’m turning to the mandatory readings now.

    The insights of behavioral economics about firm behavior and their potential implications for antitrust law/policy are well surveyed in Armstrong and Huck’s paper. In contrast with the neoclassical formalism that underlies the Chicago School of antitrust, they claim the need to somehow reinvigorate a ‘realist school’ of antitrust through the necessary development of a Behavioral Antitrust Law: “if antitrust policy is to reflect market realities, behavioral economics cannot be ignored” (p. 22). In this vein Armstrong and Huck’s piece very much recall the progressive impetus inspiring the landmark 1930 article by Karl Lewellyn “A realistic jurisprudence – The next step”.

    The extent to which this realist enthusiasm could/should entail a paradigm shift for antitrust law, is in my view persuasively tempered by Van den Bergh’s contribution. While duly acknowledging behavioral economics’ contributions in de-stabilizing the neoclassical assumptions that underlie the dominant Chicago School, Van den Bergh claims that the behavioral antitrust movement should be better understood as a complement rather than a substitute for the Chicago School, at least for time being. Until it develops a stronger theoretical model to support a unifying theory of antitrust, behavioral antitrust should thus better join the series of post-Chicago theories that have supplemented Neoclassical Antitrust Law to more consistently and effectively reach its desired welfare aims. In the end, Van den Bergh strategically advises behavioralists to embrace a scientifically grounded reformist agenda rather than a revolutionary one. Experience perhaps shows that more can be achieved in overcoming the status quo by being prudent rather than radical.

    Only one historical warning against that wisdom. While Behavioral Antitrust certainly ascribes along legal realist impetus of bringing the law back in touch with actual life by making legal categories to reflect better a more complex social reality, it should avoid falling into the ‘scientificsm’ that ended up waning its whole progressive impetus. From the moment that the task of bringing law back in touch with life is understood as just becoming a mirror of social relations, behavioral law & economics risks to renounce all efforts of asserting a system of values independent of the existing structure of power relations – just as Karl Lewellyn’s latter work on the Uniform Commercial Code actually showed. Already by 1934, Lon Fuller understood the political implications of this Realist un-critical commitment to social science, by asking “why should realism, which starts out as a reform movement, carry in its loins [an] essentially reactionary principle?” (Fuller, American Legal Realism at 461). Let us hope that Behavioral Antitrust does not repeat Karl Llewellyn’s slip.

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