Joshua Wright, Judd Stone
Date Posted: May 2011
Dissatisfied with the mainstream antitrust jurisprudence that has emerged over the past several decades and garnered widespread consensus, and encouraged by the momentum the financial crisis has generated for intervention, competition policy scholars and regulators have turned to behavioral economics to provide the intellectual foundation for a new, “behaviorally-informed” approach to competition policy. We evaluate these behaviorally-informed regulatory proposals assuming arguendo ideal conditions for their implementation: the robustness of behavioral findings to the market setting, the appropriateness of imputing those findings to firm behavior, and that regulators and judges do not suffer the same biases. Others have effectively criticized the behavioral law and economics literature on each of these points. While we believe these criticisms have significant force, our approach offers a more fundamental critique of the behavioral antitrust enterprise. We demonstrate that, even under the ideal conditions described above, behavioral economics does not yet offer an antitrust-relevant theory of competition. We dub this result the “irrelevance theorem.” If one assumes a given behavioral bias applies to all firms – both incumbents and entrants – behavioral antitrust policy implications do not differ from those generated by the rational choice models of mainstream antitrust analysis. Existing behavioral antitrust regulatory proposals have either ignored the implications of entry altogether, or assumed without justification in the behavioral economic literature or elsewhere, that cognitive biases influence the decisions of incumbents but not rivals or potential entrants. While the theoretical failure we expose in no way limits the potential future utility of incorporating behavioral principles into antitrust, behavioral principles must lead to testable implications and outperform existing economic models before it achieves policy relevance. Despite the enthusiastic support it has received from its advocates, until this occurs, behavioral principles will not be in a position to improve an empirically-grounded, evidence-based antitrust policy. We conclude by calling on interventionist advocates of behavioral economics to demonstrate, rather than presume, that behavioral principles can generate a higher rate of return for consumers on their antitrust investment.